3) I would also argue that the bureaucratic and Confucian nature of Chinese government stifled innovation in more ways than one. Firstly, throughout Chinese history one can see that the bureaucracy was, more often than not, very resistant to any real development in Chinese economic management - the Xin Dynasty's innovative market-liberalization plans were never implemented and ended up provoking revolts that ended the dynasty, and the Song's own Wang Anshi's reforms were quite effectively blocked by the conservatives in court. Now you can say a lot about whether these reforms were actually good for China, but one thing is for sure - the bureaucracy sure as hell didn't want to try. Furthermore, Confucianism is an ideology that is essentially backward-looking, heralding the glorious days of the 'Three Sovereigns and Five Emperors' and telling everybody to emulate them. Confucius also had a noted distate for commerce, and this prejudice carried on into the rest of the literati. This is not an attitude that is conducive to progress.
While I would argue with the characterization of the Confucianism bureaucratic system as stifling, I would agree that it was the main obstacle to China pulling a Europe. China didn't experience the series of capital-R revolutions (agricultural, scientific, industrial, exploratory....) in the 1000-1800 period; Europe did - roughly in the 1400-1900 period.
The key aspect was risk aversion. In Europe loans at compound interest were legal; in China preventing that practice was one of the main roles of the state. This (among many other things) allowed China to maintain the highest standard of living in the world for most of the last 2000 years. Even the best spots in Europe (England, for example) only caught up in the 1820s, and that was in part because of declines in China due to trade with Europe. The price paid by China was relatively few skilled professional men willing to take major risks for the possibility of profit, relatively few desperate landless poor to work in factories, and relatively little capital available for ventures that could easily fail.
Interest protects the lender; compound interest guarantees the lender. Heck, as near as we can tell, the practice was
invented by government officials in ancient Mesopotamia
precisely for loans made to merchants sailing the Red Sea and Indian Ocean. Europe had the advantage of both forms of legal loans.
But these loans also serve as excellent motivators to entrepreneurship. In Europe, as in China, a man could have captained ships for two decades and mastered trade, navigation, and a dozen languages - yet still lose everything due to misfortune. In China this man would fall back on his extended family to support him (who would
not be happy with him) or lapse into poverty. In Europe a man (or king....) in the same position could offer to undertake some mad adventure - a crusade to seize the riches of Byzantium, an expedition across unknown seas, the enclosure and use of public lands for a larger profitable plantation, or an industrial venture. In exchange he would have to offer collateral - which often amounted to all his worldly possessions and some of the most valuable ones of his family. Obviously the risk that he and his loved ones might lose everything and be thrown to quite literally rot in debtor's prison would ensure the very best and most thorough efforts on the part of the borrower.
Interest-bearing loans were also essential for producing the labor necessary for industrialization. These loans to poor farmers inevitably result in a proportion that cannot be repaid except through land confiscation. If high interest is involved and/or a period of poor climate reduces yields, its easy for
most of a region's population to fall into this trap. In China this would result in revolt, which would be put down; the leaders of the revolt and local lenders (illegal, and thus we may call them loan sharks) would be put to death; and the debts of the peasantry
and land confiscations would be
cancelled. This deprived China of economies of scale in agriculture and denied it a body of rootless laborers who would
have to learn how to do whatever work was available. Europeans, by contrast, were lucky enough to have a system that could support the production of labor desperate enough to work for wages from cradle to grave.
It was equally important for producing the materials necessary. Those same abused small-farmers that turned to factory work were the primary (white) source of colonists for European expansion. The wheat that fed the growing cities of Europe was grown by North American and Australian farmers whose ancestors had generally fled debt or been transported because of it. The beginning of the industrial boom was in cotton textiles - cotton grown on plantations that had required interest-bearing loans for seed money and were run by the descendants of laborers indentured to pay off their debts. The black workers
on those plantations were occasionally themselves imprisoned and transported debtors, but more to the point they were delivered by the slave trade, a very dangerous and risky business that tended to employ debtors and be financed by interest. All of the above being illegal under the Confucian bureaucratic system.
Industrialization requires that massive numbers of people be moved around, and necessarily this will be against the will of most, and so require coercion. Widespread interest-bearing loans backed up by the force of the state were the only efficient way to accomplish this. If you want China to industrialize Confucianism has got to go, or at least compromise its core focus and principles. Why not Buddhism? The early Buddhist monasteries in China often functioned exactly like banks when it came to loan practices. If a few emperors in a row really sided with the Buddhists, and kept the country together despite the resulting disruption, who knows how far it could go?