Even if China has now the world’s second largest economy which continues to grow almost unhampered by the global downturn, the country’s leadership has reason to be anxious about the future. With labor costs on the rise while several hundreds of millions of Chinese remain impoverished, it is imperative that they simultaneously ensure cheap exports and invest in the development of a modern services-based economy. In sheer numbers, no nation in history has ever faced a challenge as daunting as China’s.

For years, China was booming. Companies outsourced manufacturing to China because labor was cheap and the undervalued renminbi made exports even cheaper. But during the past ten years, wages have tripled while the pattern of demand in the West often makes it more attractive for companies to relocate production closer to home. European multinationals are setting up shop in Central Europe and Turkey while Mexico and other countries in Latin America are more practical bases of production from the American perspective than East Asia.

There is competition from other parts of the region as well. Wages in Indonesia and Vietnam remain low while countries as Malaysia and Thailand are rapidly catching up compared with Japan, Singapore and South Korea where labor costs are high but so are education standards and productivity rates.

Southeast Asia is attractive because of its relatively lax regulatory regimes moreover. Obtaining a business license in China can be an arduous process. Legal protection is scarce but corruption rampant. Brand names, copyrights, patents, trademarks and trade secrets are routinely stolen while investment is many sectors of the economy is either restricted or prohibited altogether. In the ASEAN countries, business freedom is generally greater while foreign companies and investment are welcomed.

As though the necessity of reform in this area weren’t intimidating enough for a country that has so accustomed to state control, China’s demographic clock is ticking like no other nation’s in history. “Already losing its cheap labor advantage right now, China is set to stockpile elders from here on out at a pace never before witnessed,” observed Thomas Barnett at World Politics Review last month. By the middle of this century, more than four hundred million Chinese are expected to have retired — more than America’s total projected population by that time. “That should explain what’s driving China’s seemingly selfish economic strategy,” according to Barnett.

But in addition, China is now expected to cover the spendthrift West’s need to boost exports while also serving as income elevating engine for the rest of the world’s developing economies — largely through the Middle Kingdom’s ravenous resource demands.

The United States have been urging Beijing to appreciate its currency and submit to a rebalancing of world trade in order to boost the competitiveness of American exporters at the expense of the Chinese. Barnett warns that China interprets this as “nothing less than an attempt to destroy the ruling Communist Party’s primary source of political legitimacy — namely, China’s ongoing per capita income expansion.” China won’t move on currency as long as it has millions living in poverty and many millions more whose livelihoods depend on exports to the West.

In the last three decades, as China carefully liberalized its market, it has always professed a “peaceful rise” on the world stage. But China is a great power now, one that has to transform into a mature, industrial economy — in just one generation. Its strategy, like any other nation’s, is grounded in self preservation and this will become increasingly evident as China scrambles for resources and investment overseas. The Chinese century has only just begun.