Japan recently acknowledged that China had outstripped it to become the world's second largest economy. China also recently overtook Germany to become the world's biggest exporter. Thirty years of economic reform in China have created an economic miracle.

Given this background, many people are urging China to rapidly head for the high-end of the world market and global supply chain, and rapidly upgrade its industrial base. From this point of view, Geely's recent purchase of Volvo would be a pointer to China's future.

But although China is the world's second largest economy, it still has serious problems. When it comes to creating high-end products, China lags far behind the United States and Europe. And at the lower end it faces challenges from countries like Vietnam and India.

Most of China's top 500 enterprises in 2010 are state-owned; the top 30 are all state-owned. The highest-placed private enterprise �C Huawei Technologies �C is ranked 37. And only a handful of these firms are working on high-technology or new energy.

There were 30 Chinese enterprises among the world's top 500 in 2010. But that year, China accounted for 8 percent of world GDP. Proportionally, China's world-class enterprises are performing far below par. And nearly all the top 30 are state-owned, meaning they include almost no truly competitive, market-based enterprises.

The imbalance in favor of state enterprises shows that China hasn't yet made a major breakthrough and that there is still a huge gap between China and rest of the world when it comes to developing high-end and new technologies.

The Chinese industries that have had most impact on the world are at the lower-end, represented by shoes and socks, lighters and sewing machines. They are characterized by low added-value and low technology. And as the cost of domestic labor gradually rises, China's comparative advantage is being eroded by competition from other Asian countries.

When China's textile industry faced a crisis recently, Indian enterprises were quick to take advantage. India is now the world's second largest textile producer, and a real threat to its Chinese competitors. In the toy market also, many European and American companies are now looking to India as an alternative to China.

It will be very difficult for China to upgrade its industries by competing on the world market. A better approach is to boost domestic demand to create a healthy home market for higher-end products.

Senior officials have been increasingly talking about boosting domestic demand by adjusting the distribution of income. Hopefully, ordinary people will soon be able to wave farewell to low-end consumption and will increasingly seek better quality goods. Domestic enterprises will be forced to abandon the lower end of the market and develop higher-end products. Boosting mass domestic consumption is a very practical way to achieve breakthroughs at the higher end of the market.

Governments at all levels around China have defined a development path based on a rapid-rise in mid-market industries and achieving breakthroughs at the high-end. But, so far, most high-end ventures have seen little success. For now, China should concentrate on the mid-range rather than the high end of the world market. Meanwhile, boosting domestic demand will encourage firms to develop high-end products for the home market.

The author is a financial and economic scholar.