Yao Xinyu, founder of a popular software hosting service called GitCafe, opted not to attend college because he felt he could do a better job teaching himself what he needed to be successful in the real world.

His parents disapproved but he stuck to his guns, studied on his own and built the successful startup after attracting 3 million yuan in capital from Greenwood Asset Management in late 2013. The 24-year old doesn’t see much chance that colleges in China will change to better meet the shifting needs of China’s economy, he said, since demand is high, their business model is profitable and there’s little incentive to adapt.

“I just decided I knew how to develop my own career,” he added.

One the knottiest problems China faces as its economy slows is a mismatch between people’s education levels and the needs of an economy increasingly reliant on technology and innovation, the Organization of Economic Cooperation and Development said Friday in a report on China.

China’s productivity is decelerating and it’s important to reverse this “worrisome” trend given the nation’s rapidly aging population and the related prospect of slower rates of savings and investment, the Paris-based organization said.

“The knowledge taught and skills nurtured at school do not sufficiently match labor market needs,” it said. “Workplace training-based vocational education arrangements are woefully inadequate.”

While China has aggressively stepped up its spending on research, this isn’t translating sufficiently into innovation, the 34-member OECD said. China’s spending on research and development hit 2% of gross domestic product in 2013, which is above the European Union average, and has set a target of 2.5% of GDP by 2020. But innovation remains weak as measured by international patenting and trademark registration, the report said. “And the bulk of university research is not relevant for business,” the OECD said.

Many of China’s past gains in productivity were related to capital, but the country’s future focus should be on the economic benefits of better trained workers, said Angel Gurria, secretary general of the Paris-based group. “Productivity, productivity, productivity, it’s not a choice, it’s a must,” he said. “Without it, China’s not going to be able to continue growing at this cruising speed.”

China has targeted economic growth of 7% this year, a reduction from last year’s 7.4% which was its slowest pace in nearly a quarter century.

A 2013 survey by the MyCOS Research Institute of 150,000 graduates found the skills they learned in school often did not match the needs of companies, particularly in management, programming and “soft” areas of expertise like negotiating, trouble shooting and analysis. Many of these skills are important if China is going to expand its service industry and reduce its dependence on manufacturing, investment and exports, the OECD said.

While more money is being spent on education, average starting salaries for teachers are comparatively low amid stark inequalities over access to schooling, the report said.

Another major problem is that China’s school system has too often tended to emphasize theory over practice, said Tang Min, chairperson of the YouChange Foundation that funds education projects and a former official with the Asian Development Bank and China’s State Council. While the country has vocational schools, most of them are trying to convert to four-year academic institutions that are more lucrative and prestigious, he said.

“China’s education system is relatively backward and exam-oriented,” Mr. Tang said, adding that changing the system will take time. “That’s one reason for the slowing economy. Business is moving fast, there’s more competition from abroad and the comparative advantages of China are less.”

China has initiated various reforms. Last fall it announced a plan to reduce the singular importance of the gaokao, the national college exam, by including more information on prospective entrants’ high school records in university applications. And in January, the State Council issued a draft proposal making it easier to start private schools and giving provinces the authority to approve institutions of higher learning. But critics say reform is slow and doesn't go far enough.

The Chinese education system’s inordinate focus on test scores discourages creativity and critical inquiry, analysts say. But it has at least fueled development of one creative sector. Blistering pressure to get into top schools leads to “myriads of cunning techniques and keeps afloat an industry of innovators, producers and suppliers of cheating devices,” the OECD said.

-- Mark Magnier