The recent attacks on Chinese police in the northwestern, Muslim-dominated Xinjiang region seem to confirm Beijing's claim that Islamist separatists are the biggest danger during the Olympic Games. The week before the opening ceremony, Col Tian Yixiang of the Olympics security command centre told foreign journalists that the main threat came from the "East Turkestan terrorist organisation," a group that claimed responsibility for blowing up buses in Shanghai and Yunnan in July, killing five people.

However, like the riots in Tibet last March and April, the secessionist peril regularly used by the authorities to justify brutal crackdowns on dissent masks a deeper problem facing the Chinese regime. That problem is neither principally ethnic nor predominantly territorial but fundamentally religious - hence Beijing's desperate attempts to control and repress independent faith groups.

To be sure, among the protesters in Tibet and Xinjiang there are separatists and terrorists, but the origins of radicalisation and extremism among Tibetan Buddhists and Xinjiang's Uyghur Muslims can largely be traced to the social and cultural impact of Beijing's centrally-enforced modernisation on the local populations.

Like Tibet, Xinjiang province is nominally autonomous but tightly ruled by Beijing. In recent years, ordinary people in these regions have undoubtedly benefited from substantial investment in infrastructure, education, and public health: life expectancy is now higher and poverty lower than in China's undeveloped western rural provinces.

However, the ideology of modernisation has also led to a toxic mix of ethnic colonisation and cultural devastation, with millions of ethnic Han Chinese being imported to boost the local economy. The indigenous culture of Tibet's capital Lhasa has been disfigured and displaced by modern bars and "Buddhist theme parks" for foreign tourists.

After decades of military coercion, China's leadership has finally grasped Karl Marx's point that there is nothing like unfettered capitalism to destroy traditional cultures. But the ensuing resentment and anger is fuelling the flames of religious extremism even among those Tibetans and Uyghurs who are demanding autonomy, not independence. The Communist policies of assimilation and repression are unwittingly playing into the hands of Al-Qaeda's operations in the border region of China and Central Asia.

Elsewhere in China, the consequences of modernisation are producing a significant revival of religion that the Communist Party struggles to contain. Under Mao, organised religion was banned and its traditional institutions of charity and social support destroyed. Now that economic liberalisation is exacerbating poverty among China's peasants and urban underclass, religious groups are providing help to the needy.

Confronted with growing social and political discontent - last year alone, there were more than 87,000 separate protests across China - the country's leadership has discarded Mao's atheism in favour of Confucian religious philosophy. Since the Party Congress of 2007, the Communists' self-proclaimed mission is to create a "harmonious society" that fuses ancient Confucian principles with modern socialist utopianism.

This strategy has backfired. Ordinary Chinese distrust both Communism and Confucianism, viewing both as colluding with each other at the expense of the common good. Instead, the population is turning in large numbers to faith groups and spiritual movements such as the Falun Gong, which resonate with the traditional religions of Buddhism and Taoism.

Because indigenous religions like Tibetan Buddhism, Uyghur Islam and the Falun Gong are organised groups that contest the Party's power monopoly, repression has been swift and severe. Chinese activists regularly accuse Beijing of violating the human rights of Tibetan Buddhists and Uyghur Muslims. According to the UN Special Rapporteur, Manfred Nowak, Falun Gong members make up two-thirds of all reported torture victims in China and half the labour camp prisoners.

Fearful of foreign interference, the Communist Party is also persecuting those Christians who refuse to join the officially sanctioned church bodies.

The effect has been to drive faith groups underground, where they convert people in huge numbers. Falun Gong spirituality is thought to be practised by more than 100 million Chinese. Protestant Christians who worship in illegal "house churches" number around 110 million, perhaps as many as 200 million. Taken together, organised religion constitutes a substantial and growing potential for collective opposition to the regime.

Beijing's recent record in repression and persecution casts doubt on whether China's economic reforms will be followed by political liberalisation and genuine religious freedom. By embracing capitalism, the one-party state offers many citizens new opportunities to consume and work. But more liberty in the private sphere has been matched by a greater control of the public political realm where organised religion remains banned.

Perhaps more than the economy, it is the ongoing battle over China's soul that will determine its identity and place in the world.

Adrian Pabst teaches religion and politics at the University of Nottingham and is a research fellow at the Luxembourg Institute for European and International Studies.