Hmm. That's a pretty big question.

So, what was China doing when the Industrial Revolution started? Taking the question from a broad economic perspective:

The second half of the 1600’s saw various economic difficulties in China, which began to let up in the late 1680’s and 90’s, and by the beginning of the 1700’s, the Qing empire was in growth mode. The population boomed, growing from 150-200 million in 1700 to 320 to 350 million in 1800. Many of these new people moved to frontier areas, including into areas just conquered by the Qing state in the north and west of China. However, population densities also increased significantly in the already densely population areas around the major rivers and in the southern economic core.

Commercialization and long-distance internal trade became very significant elements of the Chinese economy. Kenneth Pomeranz believes that health and living standards were pretty similar between the core regions of China and England during this century. Meanwhile, maritime trade with Europe, Southeast Asia, and the Americas was bringing in huge quantities of silver. For example, China was bringing in about 6.4 million taels (Chinese ounces) of silver a year during the 1760’s (mostly in exchange for tea, but also silk, and porcelain). This definitely helped with the development and commercialization of the economy, with monetization spreading thoroughly to nearly all parts of society.

In other words, while the Industrial Revolution was getting going in England, things were pretty good in China as well. Kenneth Pomeranz’s The Great Divergence looks pretty carefully at the economic situation in China during the 18th century, if you’re interested. It also takes a stab at answering questions about why the Industrial Revolution didn’t happen there. Victor Lieberman’s Strange Parallels volume 2 also considers Pomeranz’s arguments in brief, as well as some criticisms of them.

What was the state of China in the 1700’s?

Governmentally, the whole period was covered by basically three emperors: the Kangxi emperor, the Yongzheng emperor, and the Qianlong emperor. The Qianlong emperor technically abdicatated in 1796, but continued effectively running the country until he died in 1799. The Kangxi and Qianlong emperors are generally seen as good, strong emperors, and the Yongzheng emperor as being not bad. All in all, the country was pretty stable.

However, G. William Skinner points out that the administration basically stagnated in size during the early modern period. For example, there were 1180 counties in the Han dynasty and 1360 in the Qing, about 1700 years later and with seven times the population. Likewise, the number of official posts remained virtually stagnant from the Ming, around 20,000. Since the population kept expanding, this had a number of effects. One of them was that increasing numbers of Chinese literati, whose class status was based on passing the imperial exams and getting a bureaucratic post, couldn’t do so. By the 1700’s, your chances of getting an imperial post in any given year were minute. This meant that a lot of literati turned to other pursuits - teaching, secretarial work, and conspicuous consumption - to establish their class status. Likewise, as the number of people in each county increased, the effective responsibilities of the government shrunk. Consider that the subject to official ratio in 1600 was about 9000:1 but by 1850 it was about 21750:1. Activities that were once seen as government responsibilities (firefighting, water control and public works, famine relief, public security, moral indoctrination, etc.) were increasingly passed on to local gentry and literati. It has been argued that this marks a decline in the long-term effectiveness of the Chinese state that was to become a serious problem in the 1800’s.

In the face of this situation, the imperial government focused (relatively) more and more resources on the north and west, where China’s traditional steppe enemies lived. The administration of the south and east was more and more left to lower level officials. Perhaps the most important example of this would be in terms of maritime trade with Europeans, which occupied a muddled sort of legal and moral grey zone in the mind of the imperial court. However, the court allowed local officials in Canton and their merchant allies to keep the trade going basically so long as the customs kept getting collected and the bribes kept making their way up the hierarchy. This would, of course, lead to other problem later, but the Qing probably couldn’t have reasonably foreseen them.

Hopefully that answers the question you asked there.

What changed in China when the industrial revolution was in swing?

Well, during the 1700’s, propagation of western ideas and technologies to China certainly did occur. Western mapmaking techniques, for example, were spread by Jesuit missionaries to the Qing court, and they did important work creating a series of massive atlases of China for the government. China also imported substantial quantities of English woolens, a classic early industrial manufactured product. By the 1790’s, this was occurring to the tune of about a million taels a year. European clocks and clockwork were fashionable amongst the literati and political elite — this was known as the singsong trade. Take a look at China and Maritime Europe, 1500-1800 for coverage of this sort of interaction.

However, after a certain point, the history of what changed in China during the Industrial Revolution becomes basically a history of China in the 1800’s. I’m not going to try to cover it all here, but I can recommend some books. A really good recent history of the interaction between China and the West is Hevia’s English Lessons: The Pedagogy of Imperialism in Nineteenth-Century China. Opium occupies a notorious place in this story: for that I would recommend The Social Life of Opium in China, by Zheng Yangwen.