Mainland China has been the med tech world's hot spot for some time now thanks to a population exceeding a billion and a growing middle class. Some of that affection has shifted to India, perhaps not a bad idea even if you discount some recent news.

By now, many have heard the rumblings that Beijing is intent on pushing out foreign med tech firms with protectionist policies as reported Aug. 20 in Medical Device Daily by Kristine Yang, our Asia correspondent. However, Kristine also reported in the Aug. 18 edition that Beijing is using trumped-up anti-trust allegations against multinational firms in several industries to raise protectionist barriers of a different sort.

So there are a lot of reasons to be worried about the goings-on in Beijing. The bigger problem, however, might be what's not going on in China as a whole.

Bad paper piling up, brains leaving

Everyone knows there's a lot of junk debt supporting China's economy, which is one of the reasons Beijing has done all it can to keep GDP growth at or near 10%. The question is, how long can the central government keep pasting over these problems?

According to this article in the Australian Financial Review, banks in China are cutting off lending to private industry, especially small companies. Bank of China has indicated it will lend to almost no one other than the government, which might not sound all that bad until you realize that centralization is the economic problem everyone in Beijing since Deng Xiaoping has tried to fix for the past three and a half decades. The authorities also like to claim the bad loan rate is about 1.5%, but I doubt whether anyone in their right mind believes that.

China has done quite well in recent decades fostering an industrial economy, but there is trouble afoot. This report is just one of many spelling out one of the big reasons China is losing its edge as a low-cost industrial producer; other nations are jumping in and can do it cheaper than China (we might also ask: When American currency starts flowing to these other nations, will Beijing still be in a position to manipulate its currency?).

So what's a post-industrial economy to do? Why, innovate, of course. Can China pull that off? Not if its system of higher education is any predictor. China has only two institutions of higher education in the top 100 according to this report, but it has a fifth of the world's population. Yes, they do send students abroad, but more than half of them never go back home, as this report makes clear. That's no way to build an innovation economy, especially one that lags badly where innovation is concerned in the first place, as this survey demonstrates.

And let's face it: We all have serious misgivings about the idea that the state can simultaneously control an economy and unleash innovation. You might as well try to blend 90-weight gear oil and apple cider vinegar.

Doomsday demographics?

China also has to account for its post-World War II baby boom, which arrived later than those of Western nations, but is quite real. The government's attempts to foster fertility has fallen flat, however, leaving Beijing with the dilemma of how to support an economy when the numbers of workers is falling thanks to a fertility rate of less than 1.6 births per woman, far short of the numbers needed just to stabilize the population.

We addressed several weeks ago China's official intellectual property piracy agenda, and one might see the rampant nature of IP theft in China as an index of desperation. If so, device makers may want to seriously consider that China is a decent market (at best) for the near term. It's almost certainly a big loser in the long run, and a very hazardous bet at any time.