The answer to this is found in the Epilogue. Basically, Diamond argues that it was China’s unity that made it lose its lead to Europe.
Here again, Diamond is making a geographical argument. He says that China was easily able to dominate a huge area of land because that land did not have many geographic barriers. One government could easily dominate all of it. This meant that China had no real rivals in its region. Every other country in the region was subordinate to China and could not seriously challenge it.
We know that competition tends to make companies and people improve themselves and Diamond is arguing that the same is true for countries. He is saying that China did not have to compete with anyone and so it did not need new technology. In fact, it could even give up technology like sea-going ships because it had no competition.
By contrast, Europe was broken up geographically into a lot of relatively little countries. Those countries competed vigorously with one another. Therefore, the countries all had to try as hard as they could to get more and better technology.
Thus, because China did not have to compete and the Europeans did, China lost its lead.