…a pattern is developing. One company cedes its intellectual property to a Chinese SOE [state owned enterprise] and then all of them are then squeezed to the margins of China's domestic market, and face a new competitor.

The business world: Observations on business, finance, media and technology

None of this is accidental, or a case of over-eager SOEs crossing the line. China wants to transform from being the factory of the world to an advanced economy and is using its market power to take a short-cut by "digesting" others' intellectual property. One State Council report called for the "absorption, assimilation and re-innovation of imported technologies".

The rail case has shocked foreign companies - Christian Murck, president of the American Chamber of Commerce in China, says it has "changed considerably" their commercial calculations - but they have shown little backbone in resisting it. "They squawk a bit but there has been no mass exodus," says Denis Simon, a professor at Pennsylvania State University.

The lesson the Chinese government will probably take from the affair is that it can get away with its "re-innovation" with impunity. Jeff Immelt, GE's chief executive, complained at a private dinner in June about China not wanting western companies "to win" but GE is now partnering with CSR in the US while Siemens bids with CSR for a Saudi Arabian contract.

The Chinese knack of copying products - the shanzai or "knock-off" culture that spawns imitations of iPhones and Adidas shoes - is an old challenge for western brands. It is hard to get too angry at China for going through a phase in which enforcement of intellectual property law is lax when countries including the US did the same.

But there is a difference between informal pirating, which the Chinese government accepts is a problem and has tried to curb, and the state-approved co-option of technologies. The former is private enterprise running wild whereas the latter is an official effort to leapfrog a phase of industrial development.

It is also an admission of weakness. Chief executives of private Chinese companies, particularly in technology and software industries, worry about their country lacking an innovative culture. In spite of high educational standards in Shanghai, they are concerned that people do not think creatively enough to produce the next Google.

David Fuller's view This policy of technology transfer as a precondition for access to China's markets is not new and has been discussed previously by Fullermoney.

Western and Japanese corporate management have succumbed to the short-term lure of immediate sales in China's booming market, at the cost of creating a formidable competitor for the future. This looks to me like a short-sighted policy, although they may feel that if they do not agree to China's demands, someone else will.

I do agree with John Gapper's comment that it is an admission of technological weakness by China although this is unlikely to trouble the country's rulers. Yes, China's authoritarian culture is unlikely to produce the next Google, but it will not feel that it needs to if it can gain technology as the price for access to its home market.