When Will China Be the New Silicon Valley?

China hit a milestone: A Chinese government report out today says the country has about 221 million Internet users, tying China with the U.S. for the biggest national Internet audience. More explosively, the report says China's Internet population increased 61% in less than18 months. At that rate, China will have 354 million Net users by the end of 2009. The whole U.S. population is a little more than 300 million.

Now, if China is destined to blow past the U.S. as an Internet market, how long before China overtakes the U.S. in creating Internet companies and services? All that activity, all those users, all those smart people looking at the Web and getting ideas -- surely there will be some tipping point when China becomes the center of Internet innovation. Instead of the Chinese using translated Google and YouTube, we'll be using translated next-generation Web services invented by the Chinese.

You think? Or...maybe not. China certainly has created some successful Internet companies, like Baidu and Alibaba. But so far they've been me-too companies, mimicking successful Silicon Valley entities. Nothing from China has yet broken new ground and washed ashore here.

Less noticed was another report out of China today: Its Ministry of Industry and Information said the "electronic and information industry" in China grew 18.6% the first quarter, which is pretty good except that it's 10 percentage points behind the national average industry growth -- and far behind the pace of increase in the nation's Internet use.

Lots of things in China get in the way of a blossoming of Internet entrepreneurs. U.S. venture capital has been flooding China, and Intel just set up a $500 million China fund. Still, a typical Chinese with an Internet idea would have trouble raising money or getting a bank loan to get started -- it's just not part of the culture.

And then there's the censorship. My friend Paul Wiseman just published an insightful story about "hacktivists" who try to help fellow Chinese get around the state's Internet censors. No question that heavy government interference unintentionally keeps a lid on Internet innovation. Some people might think twice about starting a next-generation video sharing site or social network if they worry the government might have a problem with it.

So on paper, China looks like it should turn Silicon Valley into an also-ran. In reality, that doesn't seem likely in the foreseeable future.