"First, we should expect China to become far more innovative," he says. "Chinese manufacturing firms are in fact already innovating rapidly. Chinese companies innovate by making many smaller, customized innovations."

These incremental innovations mostly focus on products tailored to consumer needs, are more flexible and ultimately less risky compared with Western innovation leaders such as Apple, "where engineers go into hibernation for three years and then produce a brand new product".

Second, he adds, Chinese companies roll out their innovations in the enormous domestic market first. This gives them the economies of scale that allow them to lower unit cost for products and helps to establish a low and competitive cost base.

"I expect we'll see many of China's innovative, low-cost, high value-added manufacturing firms burst onto the global stage in the coming years, and they will pose a major challenge to less-competitive manufacturing firms in the West," Dehn says. "This would be a second wave of Chinese manufacturing, competing on the basis of innovation and replacing the first wave, which was based mainly on cheap labor."

JP Morgan's Hui says the structural shift to be achieved through the changing dynamics of the old and new economies is in line with the 13th Five-Year Plan because it places a heavy emphasis on the service sectors. However, to make this shift, he says it is important for China to push reforms of state-owned enterprises and encourage the growth of private-sector companies.

In the past, SOEs have been a key driver for the Chinese economy, but going forward private firms could become the key force, he says.

To ensure economic reforms are effective, China should allow market forces to take effect, and should further develop its laws to encourage private-sector development, as sometimes standard processes like getting an operation license can be difficult, Hui says.

In addition, it is important for the Chinese government to set a more level playing field for Western firms in its domestic market, to create faster-growing industries, as many Western firms are leading the way in service sectors.

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