Their massive investment in STEM education of the past 20 years. US investment has not kept pace with inflation for the past 20 years and the US still relies on a lot of private funding for higher education and STEM research. The Chinese government has prioritized education and research. The result is China has 8x the number of STEM graduates per year as the US - and many US STEM degrees are earned by foreign nationals!
It's hard to maintain your technological edge when you aren't investing in higher education and research. You'd think someone would have linked the student loan crises to a looming crisis in national security by now, but so far that hasn't gained much traction.
Meanwhile, like Japan did decades before, China's manufacturing has become more advanced and they're now producing more complex products. No, they don't yet have a reputation for quality, but it only took Japan 15-20 years to achieve that once they started exporting more complex products. If history repeats itself then by 2040 China could be the world's manufacturing tour de force even for complex products. As fast as they're improving, I wouldn't be shocked if that were to happen in the 2030-2035 timeframe.
The real problem plaguing the West is a problem of a lack of values. We don't value wisdom, honor, and integrity. Once upon a time we pretended to, but nowadays we don't even do that. Of course we don't want to admit that to ourselves so we continue to blame externalities such as LLMs, iPads, videogames, VCRs, TVs and on and on and on.