Pettis does discuss this at length.
From the article, Pettis assumes the following is true:
1) China has overinvested in infrastructure and manufacturing capacity to such an extent
that in the aggregate the cost of additional
public sector investment exceeds the present
value of future increases in productivity generated by
the investment
2) China's long-term sustainable growth rate is substantially below the economy's current GDP growth target
Basically, qualitatively, you're right. Technological improvements can generate growth from scratch. But when you look at the historical data to try to quantify it, you see it's quite modest. Big gains have come from: women entering the workforce, electrification, containerization. The rest is incremental enough it doesn't matter in the same way.
(Part of this is how it's measured; the fact that consumers get much more value for their dollar isn't well captured, but the point remains because it's about debt-servicing, not consumer value.)
My Dad used to work as a merchant seaman, I believe he got up to first officer and had passed his captain's exam.
But then the big container ships came along, and they needed a tiny fraction of the captains, officers and seaman they needed previously per tonne and he ended up coming ashore to pursue a different career. His stories from those times are pretty amazing.
Two, the 'average' in China includes huge numbers of the rural poor. They are living in the third world; an office worker in Shanghai is not, but her income's contribution to the average is diluted by rural subsistence farmers.
This does suggest that there is room for growth via urbanization and modernization: if subsistence farmers switched to commercial farming, and the excess labor moved to productive cities, in theory you've got a productivity boom. But China's productivity is predicated on the world's ability to absorb their excess production, which is not actually unlimited. That said, the central government is taking deliberate steps to encourage urbanization (while simultaneously not undertaking some reforms that would help, like overhauling the hukou system).