I don't disagree with this or condone excessive regulation. However, if what you said is true, innovation would not happen in China. Turns out, the startup scene is just fine in China, and innovations are not happening just... somewhere else in the world. Bad example.
Their big web companies are so far almost all based on US products that were banned in China. They also failed to capture any international audience and are mostly only successful within China. Baidu, a copy of google. Weibo, a clone of twitter. QQ a clone of Facebook. WeChat a clone of Messenger. Alibaba a clone of Amazon. Etc etc
China started properly innovating, countering brain-drain, and going beyond copying what was successful in the west only in the recent years.
From what I can tell, the regulation only strengthened in the recent years. Something else must be in the works, then.