(FORTUNE Magazine) – BOUNDING UP THE STAIRS AT THE BEIJING Genomics Institute, Darren Cai, vice president of business development, pulls a flight ahead of me before I realize that the usual pace here is close to a sprint. I might have known--there are signs everywhere with messages like GET THINGS DONE! and SPEED! SPEED! SPEED! But I'm not the first to be surprised by BGI's hustle. Three years after its 1999 launch, the institute stunned gene teams around the world by decoding the rice genome in mere months, catapulting it overnight into the top echelon in genomics.

BGI's rise augurs changes in Chinese science and technology as radical as those reshaping its economy. Research at places like this genome center promises to make China as formidable an innovator as it is now an imitator. That will take years--but when it happens, look out: A billion-plus people bouncing off one another will generate a lot of creative sparks. And history shows that inventiveness is firmly planted in China's DNA: Gunpowder, rocketry, wheelbarrows, cast iron, compasses, paddle-wheel boats, block printing, stirrups, papermaking, mechanical clocks--all came first in China, often centuries before they appeared in the West.

Already China is emerging as a force to be reckoned with in delivering lucrative but incremental advances, like designing chips for consumer electronics. But its bid to become an economic superpower will ultimately depend more on its fecundity in basic research than on its ability to engineer me-too or me-slightly-better products. World-changing innovations are hard to arrive at--the American scientific and engineering culture that brought forth such miracles as color TV, Kevlar, the laser, gene-splicing, and the Internet took decades to build. For all its progress, China is still at least a decade--possibly much more--from serious scientific competition with the U.S., Europe, and Japan.

That may come as a surprise if you've been following news on the topic. Last year Wired magazine dubbed China the "first cloning superpower." Other stories have played up its budding space program, its stem-cell advances, and its embrace of bioengineered crops. But in science, as with any other pursuit, you get what you pay for. Annual U.S. spending on biomedical research, to take one example, totals about $60 billion--half from the government, the rest from industry and charities. That's more than 200 times China's aggregate spending on such research, according to a recent report in the journal Nature. Even as a percentage of GDP, China's research budget is dwarfed by those of more developed countries. In 2001 the Chinese government's R&D spending totaled $12.5 billion, or 1.1% of GDP; the comparable U.S. figures were $281 billion and 2.8%.

In short, the idea that China will soon leapfrog the U.S. in any major area of science is at war with the facts (with the notable exception of research on new energy sources; see box). Even in pursuits in which China has made headlines, it is unlikely to catch up anytime soon. Turning stem-cell experiments into therapies such as replacement organs will require expertise in genetics and clinical medicine that's relatively undeveloped in China, Yang Xiangzhong wrote in the Nature report. At best, China might emerge as "one of the leading nations" in stem-cell research in five to ten years, concluded Yang, a native of China who directs the Center for Regenerative Biology at the University of Connecticut. Seriously competing with the West in other areas is likely to take even longer, says Jing Cheng, CEO of Capital Biochip, a Beijing biotech company. "To construct a research building takes a year," Cheng notes. "To fill it with something really meaningful easily takes ten to 20 years."

Cheng is in a position to know--he had a stellar career in U.S. biotechnology before returning to his native China to help spearhead its push into the field. And his company has ramped up fast since its formation three years ago, filing dozens of patent applications and launching more than 20 products, including cutting-edge systems to probe genes' functions. In 2002, Capital's site in northwest Beijing was a field of vegetables; now it's the Zhongguancun Life Science Park, a cluster of radiant buildings set around an elegant green space. Still, it's a special case: China's policymakers are putting a lot of eggs in selected baskets like Capital Biochip and the Beijing Genomics Institute to create model centers of excellence. And new buildings are a lot easier to come by than Nobel Prizes. While Chinese expatriates have won Nobels, China has yet to claim one based on homegrown work.

For that to change, and no doubt it will, the concentrated smarts and can-do spirit of bellwethers like Capital Biochip and BGI must spread across the culture to hundreds of universities and technical schools, and to thousands of industrial, academic, and government labs. Recent visits to a variety of leading Chinese science centers--including ones working on animal cloning, protein structure analysis, and nanotechnology--show how that process is going. It turns out that the speed of China's preliminary steps toward scientific superstardom will depend on how fast its researchers do three things: turn connections into smart money, lure back talented emigrants, and put Confucius on the shelf.

FOR ALL its GDP growth, China is still a developing country with limited resources for luxuries like basic research whose payoffs may be decades away. Half of the souped-up financial engine that propels American R&D, the part that runs on venture capital and stock offerings, is only now being built in China, so funds for research still come mostly from government-controlled entities. When BGI decided to decode the silkworm genome in 2003, for example, it went to a government-controlled bank for a quick loan. "In China the banks are waiting outside your door, wanting to push their money in front of you," says Cai, the fast-paced BGI vice president. "Our credit has been very good."

How can a nonprofit institute doing basic research get commercial credit? How will it ever keep up with its loans? No problem--the government will pay, says Cai, who has a Ph.D. in biomedical engineering from the University of California at Berkeley and an MBA from Yale. (His DNA is from China.) "This was a project of high economic significance and national pride," he explains. "We knew that after we finished it, government entities would provide funding. We do things in reverse here--first we do things, then we find a way to pay the bill."

That's not bravado in his tone, it's connections--what the Chinese call guanxi. Cai's institute has them to spare: Its feats have won praise from China's leaders, and its globetrotting director, Yang Huanming, worked in top labs in Denmark, France, and the U.S. before setting up BGI with colleagues at the University of Washington at Seattle.

BGI delivered exactly what its government benefactors hoped it would: It handily beat a Japanese team in an international race to spell out the 530 million chemical letters of the silkworm's genome. The advance promises to help develop ways of tweaking the creature's genes to bolster disease resistance, among other things. Besides securing grants and building more connections, such high-profile coups are helping BGI become a launching pad for biotech startups. Indeed, says Cai, the institute aims to speedily build diagnostics and drug-discovery firms. As a start, it is collaborating with one of the nation's top botanical institutes to analyze traditional Chinese herbal remedies with high-tech tools--the idea is to isolate compounds that could serve as starting points for new drugs to fight viruses and cancer.

But BGI's funding strategy has limited potential for most of the nation's scientific startups. For one thing, China's freewheeling banks aren't likely to stay that way. And BGI's do-now-fund-later strategy is based on its ability to make high-profile advances on a tight budget, an edge that may not last.

Housed in two buildings near Beijing's airport, the institute relies on cheap labor to keep costs down. Decoding genomes happens to involve a lot of tedious steps--such as preparing cell extracts to feed into DNA analyzers--that can be performed by low-paid technicians with little schooling. BGI's brain trust is exceptionally inexpensive too: It consists largely of young biotechies habituated to the student lifestyle. During genome-decoding races, they routinely sleep on mats by their desks and eat all their meals at BGI's spartan cafeteria, where a meaty lunch ladled onto a steel plate costs six yuan, about 75 cents. "We're like a constantly fighting army," says Cai.

Those days may be coming to an end. "We've had a tendency to keep too many people on staff," Cai concedes. "We're still in a struggle to find the right balance" between employing as many technicians as possible (a high priority in a developing country with 1.3 billion people) and automating their jobs. "Genome research is changing, and the labor component is going down. We have to change too. Otherwise we will become irrelevant."

BGI can count on government agencies to help meet rising expenses for lab automation. But most entrepreneurs needing serious capital face limited options compared with their counterparts in the West. For some, the best bet is a freshly minted tycoon. "People who have accumulated fortunes in things like construction are trying to diversify into high tech," says Tsinghua University microbiology professor George Chen. "But they usually expect returns in one or two years"--a get-rich-quick mentality at odds with the need for long-term investing in R&D enterprises.

Not surprisingly, high-tech startups in China sometimes rush out commoditized products to generate early sales--a prerequisite for raising capital from investors fixated on speedy progress. Take Lianyi Biotech, a startup co-founded by Chen in 2001 and funded by a construction company in Shantou, a seaport in South China. Lianyi's first move was to set up a 100-worker plant to make bulk chemicals for cosmetics and food supplements. Attached to the factory is Lianyi's real raison d'être: a research division developing biocompatible polymers for medical implants, based on Chen's work at Tsinghua. A U.S. venture capitalist might see the strategy as a strange way to deploy a startup's capital--pursuing manufacturing instead of R&D--for it means fewer resources devoted early on to coming up with innovative blockbusters.

Still, the miracle of guanxi is beginning to bring seasoned high-tech investors--ones with more patience and scientific expertise than construction tycoons--to China's labs. Such smart money is behind Tsinghua University's Foxconn Nanotechnology Research Center, a handsome new institute funded by Foxconn Group, a computer parts maker in Taiwan.

The center's guiding light is Tsinghua professor Fan Shoushan, an expert on carbon nanotubes, whose career has included stints at MIT, Harvard, and Stanford. Superstrong molecules resembling rolls of chicken wire, nanotubes promise everything from better light bulbs to cables strung between the earth's surface and orbiting platforms. Fan's team is known for, among other things, discovering a way to make long nanotube threads. A few years ago he was lionized in his hometown newspaper in Shanxi province. Foxconn's CEO, whose father comes from the same town, read the article with interest. Soon after, Foxconn arranged to pump $3.6 million over five years into Fan's lab in return for shared rights to discoveries that may lead to products such as flat-screen displays. In 2002 the company upgraded its investment by pledging an additional $35 million to install Fan and his team in a new, world-class facility, which opened late last year.

Roomy and luminous, the Tsinghua-Foxconn institute is blooming with the cool tools of the nano trade. But like other gleaming science centers in China, it has the air of a banquet table waiting for the arrival of distinguished guests. The wait may not be long.

Nearly 600,000 of China's best and brightest have gone abroad to study since the late 1970s, according to China's Ministry of Personnel, and fewer than 200,000 have come back. The brain drain has long caused concern in Beijing. But many of the emigrants are now returning, drawn by opportunity, not homesickness--where else can up-and-comers plug into an economy growing 9% a year?

After years in the West, many returnees bring back not only academic expertise but also a wealth of business experience. Some are even coming back as U.S. citizens. One such Americanized Chinese is David Sun, Capital Biochip's head of business development and marketing. He spent 14 years rising through the ranks at U.S. companies, including Amgen and Motorola, before Capital recruited him last year.

Of course, returnees usually earn far less than they can in America. But China's boom is lessening the disparity. Says Chen, the Tsinghua University microbiologist: "A few years ago salaries here were about 100 times lower than in the U.S. Now the gap is more like five times." And it's smaller than it looks, considering China's relatively low living costs. Even more important, adds Chen, who did postgraduate work at Austrian, British, and Canadian universities, young Chinese scientists with foreign experience can often land better jobs in China than they can in the West, such as professorships at top universities.

Cai, a management consultant at Booz Allen Hamilton in New York City before joining BGI, says he took a drastic pay cut upon returning to China last year. It was worth it, he adds, because "we think we can accomplish tremendous things here. We're not just working for some big company in the U.S. or Europe."

Cai's enthusiasm, shared by other returnees, shows that China's top labs are issuing the siren call of buzz. If you plotted its decibel level over time, the curve would closely track the labs' rising output of high-profile papers. Five years ago the Institute of Biophysics at the Chinese Academy of Sciences rarely published its work in major international journals. Last year the Beijing institute racked up a dazzling three dozen reports in such venues. Recently one of its studies, which brought to light pinwheel-like plant molecules that harvest the sun's energy, made the cover of Nature--science's equivalent of a pennant-winning home run. Bathed in glory, the institute has no trouble reeling in expatriates from places like Harvard, says director Rao Zihe, who distinguished himself as a researcher at Britain's Oxford University before taking the institute's helm in 1998. "We are fussy," he adds. "We want people stronger than me."

ONE OF THE MYSTERIES of China has been its resistance to the kind of upheavals sparked in the West by advances in science and technology. Inventions that transformed Europe during and after the Renaissance, such as chain-drive machinery and movable-type printing, had about as much impact on China as the advent of the fork. No single factor can account for this strange imperturbability. But a key contributor was the 2,000-year domination of Chinese society by its "bureaucratic scholar-gentry," wrote British historian Joseph Needham in a 1964 essay on Chinese science. Dynasties rose and fell; the bureaucracy endured. Acting as both thought leaders and administrators, this resilient ruling class was based on a merit system that emphasized mastery of the teachings of Confucius. It was a brilliant, durable system, but its heavy stress on respect for the past stifled the central impulse of modern science--to continually smack received wisdom upside the head.

Confucian conformity is alive and well in China, if the events surrounding last year's SARS epidemic are any indication. Severe acute respiratory syndrome first appeared in southern China in late 2002. A few months later it was spreading globally, triggering an international effort to identify its causal agent. In February 2003 a senior scientist at the Chinese Center for Disease Control and Prevention in Beijing declared that he had found the likely culprit in SARS victims' lung tissues: chlamydia bacteria. Wrong--about six weeks later scientists working with the World Health Organization pinned down as the agent a novel coronavirus. Yet Chinese scientists continued to embrace the chlamydia hypothesis even after the evidence against it became overwhelming. "It would not have been respectful" to challenge it, a Chinese microbiologist later told Science magazine.

The SARS bungle, compounded by a cover-up about the epidemic's spread in Beijing, led to some reforms and the sacking of top officials. But Confucian deference to authority in China is still a major obstacle to its drive for scientific excellence, says Poo Mu-ming, director of the Institute of Neuroscience of the Chinese Academy of Sciences in Shanghai. (Poo also directs the neurobiology division at the University of California at Berkeley.) Undue courtesy discourages lively scientific exchanges too, especially in public; it's considered bad form to challenge others' work, threatening them with loss of face. However, Poo recently wrote in Nature, returnees, with their alien bluntness and questioning ways, have become a major driver of Chinese science.

IT'S A LEAP, but not a silly one, to wonder whether the reversal of China's brain drain marks the beginning of the Chinese century in science. Much of the hand-wringing about international competitiveness is shifting from Beijing to Washington. In 2001, Chinese universities graduated about 220,000 students with bachelor's degrees in engineering, more than three times the number of U.S. engineering bachelor's that year. China President Hu Jintao, Premier Wen Jiabao, and their immediate predecessors were trained as engineers--they really get it when it comes to technical issues.

But alarm about Chinese scientific progress doesn't make sense, and not just because of the long haul China faces to pull even with the West. China's leading scientists, after finally breaking with conformist traditions, have no intention of conforming to the West's research agenda. Instead, they're focusing on China's strengths and needs, forging a scientific enterprise that for the foreseeable future is more likely to complement than compete with work in the U.S. and Europe. BGI, for instance, is parsing the DNA of plants and animals of economic importance to the developing world, such as rice, soybeans, and pigs. Meanwhile U.S. genome centers are studying the DNA of creatures of interest in basic research, such as fruit flies and roundworms. This yin-yang principle is at work even in cloning research, as a visit to the lab of Li Ning demonstrates.

A professor at China Agricultural University in Beijing, Li is expert at cloning goats and cows--he uses the same methods that led to Dolly, the cloned sheep. The technique yields nearly exact genetic duplicates of animals, making it a breeder's dream. U.S. stockmen, for instance, envision cloning herds of champion cattle. Li has a different dream, inspired by China's relatively high infant mortality rate, about four times higher than in the U.S.: He wants to clone bioengineered cows that give "humanized" milk.

Some 20 proteins have been identified in human milk that are missing or scarce in cow's milk. A number of them are potent bacteria killers, protecting infants from infections while their immune systems develop. Others meet nutritional needs. Li's team has managed to implant human genes for several of the proteins in mice, whose milk now includes them. Given this proof of principle, he expects to produce humanized-milk cows within a few years. Cloning would help scale up production. Besides keeping babies healthy, Li says, "the milk will be very good for old people" with fading immune systems.

Doctor Li's Very Special Milk won't be on the market anytime soon. But someday it could bolster the health of millions of babies and seniors not only in the developing world but also in the West. That wouldn't lessen the U.S. trade deficit with China. But it's nothing to wring hands about.