I actually had to write a full length research paper on the subject of Chinese science and technology fairly recently. The main reasons China didn't develop an industrial revolution were (in no particular order)...
1) Lack of the all-important merchant class, which in European societies were the prime movers and consumers of information. Confucianism venerates the ruler and the peasants, but does not attach very much value to merchants.
2) Far too centralized. I believe it was Joseph Needham who described much of Chinese government as "a Moloch state, a great octopus with tentacles reaching into every village and every hut." While this may be somewhat of an exhaggeration, China did not have the decentralization or tolerance that allows for independent science. Most of Chinese science was government directed, and often aborted or modified as so not to rock the dynastic boat.
3) Flat-out bad intellectual framework. As previously mentioned, the large influence of Taoism and subsequent mystrical undertones attached to much of the "science", meant scholars often posited opinions as fact, with absolutely no basis for them. Basically, they didn't have the Scientific Method, or anything close to it, and without that, you flat-out will NOT get an IR. Its worthwhile to note all the early Jesuit visitors to China trumpeted Sinic superiority in agriculture, arts, literature, architecture, politics, etc. The one area they claimed Europeans were vastly superior in was science.
What's kind of interesting is how China managed to produce so many innovations despite its handicaps. The explanation I believe in points out very few of these inventions were really "scientific", they were more extremely clever solutions to practical problems. Chinese society places a great value on cleverness and literacy, and with such a huge population of people, a lot of whom are better educated and have access to more resources than anywhere else in the world, it is pretty probable that they will create a lot of smart solutions. Stuff like the steel-tipped plow, bucket conveyor belt, compass- these are not creations requiring any sort of ideological framework. A smart peasant farmer could easily make the logical connection between the strength of steel, and the weakness of wooden-tipped plows. This is not to say China didnt have great intellectual thinkers, just that said thinkers had to work a lot harder to get results than a post-Renaissance European counterpart with access to a better intellectual framework. To paraphrase Dirk Kotter, China was the best inventor until the Europeans invented the best way to invent things.
4) Lack of need to innovate. China was so overwhelmingly superior to just about every other state in population, organization, agriculture, and size that they were going to dominate regardless of whether they had technology or not. They could afford to (and often did) abandon promising avenues of technology and thought in interest of stability- the big threat to Chinese society wasnt invasion, it was disunity. In contrast, European princes had to embrace just about every new technology, because if they didnt, their neighbour would, and leave them in the dust.
5) Cultural pride. Chinese society was so very ethnocentric and self-glorifying (with some good cause) that when they had chances to adopt new technology from the Europeans, they did not, on the basis that Chinese society was so obviously superior, the gwailo barbarians could neve produce anything worth keeping.