In an astonishing trashing of his country's attitudes, George Osborne added that Britain had lost its "can do" approach and had been relegated to the status of a "second-rate power".
He was speaking at the end of a five-day trip to China in which he had been awed by the speed and scale of China's economic development.
Dismissing suggestions that China has a "sweatshop" economy, he said he wished Britain would be more like the communist country.
"I also feel a bit like, my God, we've really got to up our game as a country, and the whole of the West has to understand what is happening here in Asia," the Daily Telegraph reported him as saying.
He claimed, as he waited in Hong Kong for a flight home, that the positive attitude of the country during the Victorian era and while Margaret Thatcher was prime minister has been lost.
"I do think there's an ambition in the country and a sense of optimism and 'can do' which our country had in the Victorian age and had at other points in our history," he said.
"Somewhere along the line in Britain there were bits that were great about British industry that we allowed to wither."
He added: "There has been at times in Britain a sense of defeatism. You saw that in the late 1970s when everyone was resigned to the decline of empire and Britain being the sick man of Europe. Margaret Thatcher turned that around. You saw that three years ago when everyone thought we couldn't tackle our debt problems and the financial crisis had relegated us to a second-rate power."
While criticising Britain's failures he maintained that, with the help of the Coalition, the country is beginning to improve and might one day be able match the energy shown by China and "be the best".
In a week in which he has opened the door to China investing in new nuclear power in Britain, he said attitudes to the communist state must change.
The Chancellor described China as a country with an ancient civilisation and one that should be treated with respect. He said: "China is not a sweatshop. China is different. If we have just a black and white view of China as a communist country of cheap manufacturing, and the only thing we want out of them is access to their market, then we are missing out in a very big way as a country. China is what it is. And we have to either be here or be nowhere."
Meanwhile the Chancellor expects to make a decision about breaking up Royal Bank of Scotland (RBS) imminently.
The Chancellor said he was looking at hiving off weaker parts of the state-controlled firm into a "bad bank".
He told the Daily Telegraph the issue was "top of his in-tray".
"We are looking at the case for a bad bank and, if not a bad bank, what is the alternative strategy that really gets on top of the problems in that bank and goes on being what I want it to be which is a bank supporting the British economy," Mr Osborne said.
However, he stressed the Government was not currently "close to the stage of being able to sell RBS shares".
"RBS was a much more complex bank," he said. "To be fair to management past and present, it was a bank that was in a lot more trouble."
Mr Osborne also said he was considering offering state-owned shares in Lloyds to the general public.
"We are now looking actively at a retail offer for the next tranche of Lloyds shares," he said.