How tragically apt. The V&A mounts an exhibition on Chinese design culture and Tibet erupts in flames. In a further irony, the crowds of protesters gather in London outside the Royal Institute of British Architects, which happens to be across the road from the Chinese embassy. The architects are having a heated debate, too: the international big names are arguing about whether or not it is ethical to take fat fees from China. It’s a bit late for that, really. Western architecture long ago made its Faustian pact with the Eastern Empire. Now comes the payback.

This is the great unstated, underlying theme of China Design Now - we all knew they could make stuff, but now they can design it, too, and this brings their tanks right onto our lawn. The tacit commercial understanding between East and West used to be simple: you make lots of cheap goods that we can import to keep our prices low, and we will export back lots of sophisticated, value-added design work, along with the Rover 75 production line.

Thus, the Beijing Olympics site is masterplanned by Americans, with its “bird’s nest” stadium designed by Swiss architects. Its vast new international airport terminal is by a Brit. The largest and oddest-shaped new building in the capital - the China Central Television HQ, so an instrument of state control - is by a Dutchman. You see all these things, in model and computer-graphic form, in the final room of the V&A’s show. What you also see is the emergence of Chinese architects such as Zhu Pei, whose Digital Beijing media centre for the Olympics is clever, assured and considerably subtler than the European contributions.

This is early days, because private design firms of all kinds have been tolerated only relatively recently, but it’s clear where things are going. You have only to visit the Commune by the Great Wall to grasp that immediately. The old communist phraseology has been appropriated by the new young entrepreneurs with a nudge and a wink. The Commune sounds like a workers’ collective. It isn’t.

Originally planned as a show village of cutting-edge private contemporary homes by a variety of Asian architects, it has become the ultimate boutique hotel. You stay in one of the radical houses, set in a mountain valley. You dine in the central restaurant with its adjacent spa. And you have – get this – your own section of the Great Wall to promenade along, insulated from the jostling crowds of tourists and souvenir-sellers you find elsewhere. It’s a rich person’s modern Summer Palace. There are areas that China Design Now ignores – not only politics, but the flourishing contemporary-art scene in Beijing, an investment target for many a canny western collector. Some artists have gone from poverty to millionaire status in no time.

There is much, however, that the exhibition reveals. It looks beyond the bustle of the capital to the graphic design explosion of Shenzhen, for instance. Innovative graphic design is a youngster’s activity, and in Shenzhen – which just happens to be the largest manufacturing centre in the world – the average age is 27. Graphics thus becomes an aspect of youth culture. This being China, the youth culture does not waste itself spray-painting bus stops, but instead is channelled into a new industry covering everything from posters to the (restricted) internet. There are subcultures here, yes, but according to this exhibition, the youth subcultures are not antiestablishment. How can they be, when the establishment has so materially improved their lives?

I would have liked to see more on the emerging fashion business. There is some promising stuff here in the section Shanghai – Dream City. It’s a bit confused, though. The curators have set out to draw together the threads left dangling from Shanghai’s glamor-ous interwar years. The recent expansion of Shanghai as an urban centre has gone hand in hand with a rediscovery of that period, its films, its fashions, its louche attitude. The mood is summed up by Wing Shya’s Pearls of the Orient, a 2005 photography series for a Time magazine supplement. Sulkily pouting girls in filmy 1930s-influenced dresses are glimpsed posing on the bonnet of a shiny black in-period car.

The reference here, then, is to an earlier, preCommunist engagement with the West, an era that seems more desirable because, until recently, it would have seemed so impossibly unattainable. Mao’s great portrait may still adorn the wall of Beijing’s Forbidden City, overlooking Tiananmen Square, but nobody is pretending that what the V&A’s director, Mark Jones, calls “an astonishing period of reform and growth” would have been tolerated during Mao’s Cultural Revolution. China Design Now, sponsored by HSBC, is what its name suggests: a snapshot of an interesting moment in the development of the new global superpower. Interesting because, outside all this, the unmentioned political context has not gone away. It’s the Olympics in Beijing this year, but just how rosy will things be looking by the time of the next great World Expo, in Shanghai in 2010?

China Design Now is at the V&A, SW7, until July 13; www.vam.ac.uk . The new buildings of Beijing; www.hughpearman.com/2007/19.html . Commune by the Great Wall; www.communebythegreatwall.com/en

Editor's choice

• Here comes summer: our cultural must-sees
• Friends reunited: Sex and the City
• New country for old men