I'm skeptical that China's current political environment can sustain the kind of dynamics that are very useful to get innovation. Somehow it doesn't seem very conducive to innovation to have to worry about what the Thought Police thinks you're up to, to have to deal with bureaucrats and a very top-down style of economic policy, not to be able to freely communicate with others (including foreigners) or move about your own country, etc.
On the other hand, China has the benefits of long term planning, large population, school systems that produces large quantities of scientists and engineers. Additionally, they now also have all the factories in their back-yard, lots and lots of money and a government very actively seeking to increase R&D.
In the US, we have talent wasting away in manipulating money in wall street producing no value, small term profit agendas that cannot seem to develop industries that could happen 10-20 years down the line like alternative energy technologies and a school system that is failing to produce students interested in science and technology and a culture that doesn't really laud scientific and technological innovation, a population that understands every nuance of the prime directive from Star Trek but nothing about the prime number theorem.
I guess I support the opposite view that China will succeed in innovation. USSR had similar problems you listed above but was able to innovate and advance scientific knowledge. Like the large number of medals in the Olympics, I think China will catch up and lead innovation in many fields but they will very carefully pick at what they want instead of letting it happen from individual scientists and engineers.
I don't know if your above statement is a sort of restatement of American exceptionalism, but I don't think that China being an innovation leader in a field makes US less of an innovator. I would love to see China and US both innovating and competing and I think it would be better as a world and a better US. I find that people in the US are irrationally scared from a little competition from China.