By Duncan Hewitt

China is looking to throw away its image as a producer of low cost goods and take on the world in high technology industries.

Its leaders have pledged to build a knowledge economy, with massive investment in education, to turn the high-tech sector into a major source of economic growth for the next century.

The latest move has seen three zones designated as China's answer to Silicon Valley.

One is in the capital, Beijing, one in the fast growing hub of the mainland's economy, Shanghai, and one in the southern city of Shenzhen - just over the border from Hong Kong.

BBC correspondent Dubcan Hewitt visited Shenzhen, which 20 years ago was just a village on the Hong Kong border.

He discovered how China's first special economic zone has grown into a city of three million people and one trying to put its reputation as a producer of cheap textiles behind it.

Liu Yingli, the head of Shenzhen's high-tech industrial park, outlined its hopes: "We plan to establish a high-tech research & development centre and a manufacturing base and a high-tech trade centre."

Global ambitions

Information technology accounts for more than a third of Shenzhen's industrial output.

The city makes 30% of the world's hard disk drives and multi-nationals from IBM and Phillips to Compaq and Olympus have set up there.

But officials say they do not just want to provide low cost labour for foreign companies - they want to build a launch pad for China's own firms to take on the world.

One of the firms leading the way is Huawei, which produces circuit boards for its telecommunications network systems.

Set up as an employee shareholding business in 1988, Huawei now has 11,000 staff, some 30% of China's domestic phone equipment market, and global ambitions.

Huawei's business is growing at a rate of 50% a year. Some 40% of its staff work in research, and it has imported Russian and Indian technicians in its bid to catch up with international competitors.

Raising funds a problem

Vice President Xu Zhijun has no illusions about the scale of the challenge but he says the company's dream is a realistic one.

"Compared to big companies now we're like a mouse compared to an elephant - we can't hope to compete with them all," he said.

"So we concentrate all our efforts in one area. In the area of fixed networks we've already caught up, in fact we're ahead in many respects.

"So it's step by step. Overall we may still be a mouse compared to an elephant, but our aim is to be a world-class company - and mice, don't forget, can run faster," he added.

Huawei's founders benefited from Shenzhen's special policies to get the start up investment they needed.

But for many high-tech firms in China, raising funds is a problem. The state-run banks have always been wary of lending to the private companies which dominate the high-tech sector - especially when they are small and unknown.

Plans for a stockmarket to attract high-risk investment are still under discussion.

Economist Shawn Xu, of the China International Capital Corporation, says this is a major obstacle to developing the high-tech sector.

Fresh WTO challenge

Mr Xu said: "You need to have a well-developed financing system, venture capital, capital market, and you need to have an incentive scheme - allow people to become rich overnight, allow people to become Bill Gates overnight."

Two-thirds of Shenzhen's domestic high-tech economy is already privately owned. But its efforts to become a model for China's development could face harsh new competition if China does, as seems likely, open up its markets and join the World Trade Organisation.

Huawei says it is confident that it will be able to face the fresh competition.

But Chinese officials accept that more must be spent on education and management if the country is to become a high-tech giant.

That may still be some way off but analysts say the rapid rise of firms like Huawei is a warning to the world's high-tech market leaders that they underestimate China at their peril.