In 2010 China will become the world’s second-largest economy

Not until China relaxes its exchange controls. As long as the RMB can't get out of the country to investments offering higher return, there's nowhere else for it to go.

Do you feel it's likely for developing nations to spur homegrown incubators or is it too early?

In the USA, a (somewhat) free country where open debate and some level of government transparency is maintained, the "official" government numbers are 10% unemployment.

Actual unemployment is closer to 22% (according to shadowstats.com, using the pre-Clinton Administration formula).

Aside from this article referencing their own "Economist Intelligence Unit" - how do we know the numbers are not similarly fudged by the Chinese government? Are there not billions of dollars of loans marked as "good" on state-run banks that are in fact, never going to be repaid?

The downside you mention becomes a central issue these days. The recent launched cntv.cn is a good example when the national TV in China attempt to take a big share from Internet VOD business (hulu model). To launch the site, they first use their popularity to fire bullets on other video sites for reasons such as adult content, copyright content or unauthorized content (every imported video has to be censored or it is illegal in China, the rule actually causes recent trouble in WTO). Under this pressure, many sites are closed.

The argument is, like what China did to its steel/telecom/coal business (FYI, are controlled by the nation itself). It tries to gain control on Internet, not only in management standpoint but actual business (nationalization). A more interesting view is that as most children of China's high level officials are in their 20s. They are likely to do Internet related business. Well, powerful parents bring benefits. It is not bad or unfair and it is understandable worldwide. But using your parents' money and relations to build business is millions light years far from what they do today in China. For example, Li Hehe, the son of Li Zhaoxing (former foreign minister of China) established a SNS website called 99sushe (http://99sushe.com). He actually uses his father's relation to have everyone who attend national English test (known as CET-4, required for college graduation) to register on his site in order to review their scores (http://cet.99sushe.com/). I see it as a classic abuse of their power. Far worse, to my knowledge, it is only a beginning.

YC is a institution which only provides a little money, good atmosphere, relations and access to first tier VC and law firms. Good lawyer, enough money and a brilliant you, that is the only things you need for doing "free" business in open countries (EU or U.S.). But in China, you need to build relations with high level officials. For a UGC site, you have to hire a person to delete contents immediately when the Internet cops phone you. It is just not economical for startup. But unfortunately these are crucial for your business success in China, and these are something YC China (in my imagination) cannot provide.

I think India is better option because Indian government don't control internet as US. Its growing economy and market, the huge talents and having lots of R&D centers.