Seated inside one of China's most advanced science laboratories, two PhD students dressed from head to toe in protective white suits listen intently to Mariah Carey's pop classic Hero. It is not the song, but the millimetre-thin, transparent strip making the sound that captures their attention - a nano-speaker they hope will revolutionise where, and how, we listen to music.

"This is cutting edge," says Professor Shoushan Fan, director of the nanotechnology lab at Beijing's prestigious Tsinghua University. Without a cone, magnet or amplifier, the speaker, which looks little more than a slim film of see-through plastic, can be used to transform almost any surface into an auditorium. It is made from nanocarbon tubes which, when heated, make the air around them vibrate, producing the sound. "The speaker's bendy and flexible," says Fan. "You could stick it to the back window of your car and play music from there."

Mega investment

Fan's nano-speaker is just the tip of the iceberg in China's sweeping nanotech programme, which has the potential to transform its export-based economy and nearly every aspect of our lives, from food and clothes to medicine and the military.

Nanotechnology - the manipulation of matter on an atomic scale to develop new materials - is an industry predicted to be worth nearly £1.5tn pounds by 2012, and China is determined to corner the biggest chunk of the market.

Its investment has already surpassed that of any other country after the US. Since 1999, China's spending on research and development (R&D) has gone up by more than 20% each year. A further boost will come from the £400bn economic stimulus package announced by the Chinese government this year, £12bn of which has been ringfenced for R&D.

Tiny superpower

"The overall trends are irrefutable," says Dr James Wilsdon, director of the Science Policy Centre at the Royal Society, and author of the Demos report "China: The Next Science Superpower?". "China is snapping at the heels of the most developed nations, in terms of research and investment, in terms of active scientists in the field, in terms of publications and in terms of patents."

Fan hopes the economic crisis, which has led to thousands of Chinese factories closing, will force the country to move from the manufacture of low-end products such as toys and trainers to more hi-tech goods such as nano-touchscreens for mobile phones. His team is working on a material to replace the indium tin oxide (ITO) used in the kind of touch panels found on BlackBerrys and iPhones. "ITO is very expensive and breaks if bent," he says. "We're developing thin nanotube films to replace ITO. It can bend and it's much cheaper."

China now produces more papers on nanotech than any other nation. Nanotech plants have sprung up in cities from Beijing in the north to Shenzhen in the south, working on products including exhaust-absorbing tarmac and carbon nanotube-coated clothes that can monitor health. Last month, researchers from Nanjing University and colleagues from New York University unveiled a two-armed nanorobot that can alter genetic code. It enables the creation of new DNA structures, and could be turned into a factory for assembling the building blocks of new materials.

"There's no end of areas in which nanotech is already being used," says Wilsdon. "It's the product of targeted investment for the development and refinement of novel nanomaterials. And the reason the Chinese focus on that area is because it's closer to the market."

Small-scale war

China, like the US, is also assumed to be focusing much of its R&D investment on military applications. "There's a lot of concern about the use of nanotech with weapons," says Wilsdon. "I'm sure China is spending significant amounts of their R&D budget on military uses."

Tim Harper, founder of the nanotech consultancy Cientifica Ltd, says carbon nanotube composites could be used to strengthen armour, that non-scratch nano-coatings are being developed for cockpits and researchers are trying to find a nano replacement for military-use batteries. "The US is working on all of these things, so I'm sure the Chinese are doing much the same," he says.

Underlying these developments are serious safety concerns. Nanoparticles are so small they are easily inhaled and absorbed through the skin. Dr Andrew Maynard, the chief science advisor to the Project on Emerging Nanotechnologies at the Woodrow Wilson International Center for Scholars in Washington, says that some nanoparticles could be deadly. "Nothing has yet been confirmed, but there are strong suggestions that inhaling these particles could cause lung cancer or lung disease," he says. "If carbon nanotubes behave anything like asbestos, we won't know what the health impacts are for about 20 years, because that's how long it can take from exposure to the onset of the disease."

Most experts agree that a system of stringent safety regulations and comprehensive quality inspection checks is needed before China's nano-coatings, cosmetics and clothes are stocked by supermarkets. "The economic crisis could prove the catalyst that Chinese nanotech companies need to get this system in place," says Harper.

Under the microscope

The global nanotechnology market could top $2tn by 2012, predicts Tim Harper, founder of the nanotech consultancy CMP Cientifica. "What we see is a big take-off in 2011, and by 2012 the industry is really going to be booming," he says. "We've been pumping hundreds of millions of dollars into the nanotech industry for the last decade and we're finally getting to the point where we're seeing products being manufactured and sold."

Harper predicts that by 2010, areas of nanotechnology and biology will have merged, setting in motion the production of a wealth of new drugs and clinical equipment (such as the vials of nanomaterials for use in health products, clothes and cosmetics). His research sees nanotech pharmaceutical and healthcare products worth an estimated $3.2tn by 2012, with military-use nanotech products taking 14% of the total market and worth $40bn.

Nanotech products for the motor industry will make up a 4% chunk of the market, while nano-foods are likely to corner up to 2%. Nanotech products designed to tackle water, air and soil pollution will also be big business in 2012. "In terms of environmentally beneficial materials, in some ways the Chinese are further along in their thinking than even the US," says Harper. "They are already putting together a system to work out how we can use these technologies for the good of the environment." The US may still lead the nano surge overall, but Harper believes China will be on a par with the EU and US by 2012.

Richard Appelbaum, from the Center for Nanotechnology in Society at the University of California, puts the global nanotech market figure at $2.6tn by 2014, or 15% of manufacturing output in that year. China, along with 40 other countries including the US, UK and Japan, is investing in nanotechnology "as a major key to global economic competitiveness", he says.

If any one nation succeeds in cornering the giant's share of the market, it "would be sufficient to confer global economic leadership on the country", he adds.