Despite the booming economy and government incentives to return, an increasing number of the country's brightest minds are relocating to wealthier nations, where they can usually benefit from higher living standards, brighter career opportunities and the freedom to have as many children as they wish.

The Chinese Academy of Social Sciences revealed 1.06 million Chinese had gone to study overseas since 1978, but only 275,000 had returned. The rest had taken postgraduate courses, found work, got married or changed citizenship.

Unlike illegal migrants from the countryside - many of whom are poorly schooled - the students are usually welcomed with open arms by western institutions, which gain high scholarship fees and academic excellence.

Britain has gone further than most to attract this pool of intellectual talent. Chinese students have been the biggest group of foreign nationals at UK schools and universities for several years. Last year their numbers increased 20% to 60,000.

The report claims the lack of first-class scientists and research pioneers represents the biggest obstacle to China's ability to innovate.

"This shows that Chinese students overseas, especially those with extraordinary abilities, are a real hit in the global tug-of-war for talent," Yang Xiaojing, one of the authors of the report, was quoted as saying in the China Daily. "Against the backdrop of economic globalisation, an excessive brain drain will inevitably threaten the human resources, security and eventually the national economic and social security of any country."

To reverse the trend, Beijing is offering bigger incentives for returnees. Under new regulations issued in March, senior scientists, engineers and corporate managers are exempted from the household registration system (which determines various state privileges in China), allowed higher salaries and promised places for their children at top universities.

But despite these enticements, the problem may get worse. In 2005, 118,500 students left China to study overseas. By 2010, the forecast is 200,000.

Bai Xue, who is enrolled on a communication studies course in the University of Minnesota, says more than 80% of her Chinese classmates are trying to remain in the US. Her plan is just for a short extension, but she is keeping her options open. "There are a few of us who are thinking of returning, but nothing is fixed. If we get married or have babies or get used to the life here, maybe we will change our minds."

Xia Qing will start postgraduate study in California this September, but he is already planning to stay in America for a few years after his course finishes.

"I am slightly hesitant because China is developing very fast and by 2030, its GDP will probably surpass the USA. But I am concerned that I might not get a good job if I return. America may suit me more because they judge you according to your ability, whereas in China your background and connections are more important."

A survey this year found that in Shanghai 30% of high school pupils and 50% of middle-school students wanted to change their nationality.