What is going to hold China back from the "next step" is not going to be money, cheap labor, or even innovation. It'll be infrastructure, and the vast costs associated with building and maintaining it. We're seeing the costs now, as birth defects are soaring amid increased pollution. Quite simply, the country is a dirty mess, and cleaning it up (and keeping it clean) is a huge problem.
When your birth defects rise 40% in 6 years, you've got a problem, particularly when they already have a one-child policy.