Continued innovation to help China avoid middle-income trap: HSBC

China is becoming an innovation-driven developing economy, and innovation, if continued, will help the country ward off the "middle-income trap", according to a recent HSBC report.

While some foreign observers hold pessimistic views on the slowdown of China's economic growth, new growth drivers are rapidly evolving, the report said.

China is the only developing economy in the top 25 most innovative countries, according to the report, which cites the Global Innovation Index compiled by the World intellectual Property Organization (WIPO).

China is also the world's third largest patent originator, and Chinese patents rose to 43,168 in 2016, up 44.7 percent from the previous year, WIPO data showed.

The innovation boom is being driven by economies of scale, financial and manufacturing eco-systems, good infrastructure and supportive policies.

Dynamic financing in different sectors that feature venture capital investment, and a strong network of suppliers also provide an eco-system for China's success in innovation, the report said.

Across China, urbanization is gathering large clusters of consumers, who are connected with the internet. Over 750 million Chinese, more than half the population, are now online, 96 percent of them via smartphones, according to the China Internet Network Information Center (CNNIC).

Rapid urbanization allows China's internet companies to quickly gain high numbers of users, the report said, referring to the cases of Chinese internet giants Baidu, Alibaba and Tencent.

Over the past decade, the central government has put in place measures to support innovation by investing in education and improving human capital and physical infrastructure, which "enabled productivity to rise", noted the report.

In the report HSBC acknowledged Chinese innovation as a sign of the "dynamism of the Chinese economy" and a "vital ingredient" for the country to change its future economic growth model.

China's current innovation is mostly driven by consumer-facing companies, and more efforts are needed to achieve progress in knowledge-based areas of science and technology.

The Alibaba Group announced Wednesday it will set up a research institute, the DAMO Academy, and invest over 100 billion yuan (about 15 billion U.S. dollars) over the next three years in the development of advanced technology.

The academy aims to attract world-class talent in such areas as quantum computing, machine learning, basic algorithms and network security. DAMO stands for discovery, adventure, momentum and outlook.