For those who dread - or relish - the prospect of China becoming a dominant provider of information technology services as well as a powerful industrial exporter, McKinsey has a message: China is unlikely to do in global services what it has done in manufacturing any time soon.

In a report prepared by its own think-tank and its China office, the management consultancy says China does not have nearly enough capable university graduates to develop a strong offshore services sector similar to the one being built in India. Indeed, graduate talent is so scarce that the problem is already causing headaches for multinationals in China and Chinese companies with global ambitions.

Based on a year of research and interviews with human resources officers, the report confirms anecdotal evidence that beneath a thin layer of remarkable talent at the top, there is a dearth of skilled people in the upper and middle reaches of companies in China. The services sector is starting to feel the pinch and private sector wages for skilled staff are rising fast, as they are in India. Mphasis, an Indian IT services company, complained six months ago that it had found only a quarter of the 400 software developers it was hunting for its Shanghai office.

According to McKinsey, China's problem is not the number of graduates churned out by universities - there will be 3.1m this year - but their ability to do the jobs for which they apply. Much of China is in thrall to rote-learning and to Confucian traditions that reward unquestioning respect for teachers rather than initiative.

Poor English and lack of practical skills are particular issues, and less than a tenth of candidates are considered suitable to work for a foreign company in fields such as engineering, finance and life sciences; among Indian engineering graduates, a quarter are seen as capable. Indians are also more mobile in their own country.

There is no reason, however, for Indian competitors or for western opponents of "offshoring" to be complacent about China's difficulties. First, the problems are those of success. China's economy has been growing at a headlong pace for more than two decades. Foreign services sector employers cannot find graduates because they have already been snapped up by domestic companies or foreign manufacturers.

Second, China is aware of its skills shortages and working hard to remedy the situation, both by providing more funds for higher education in China and by encouraging the flow of Chinese students to universities abroad.

If Beijing wants to move up the value chain by developing globally competitive service industries, its priorities should be to improve the quality and not just the quantity of graduates and to raise standards of English. The history of the economic reforms since 1979 suggests that this formidable task is well within China's capabilities.