General Secretary Jinping Xi advocates that market should play a decisive role in allocating innovation resources. Neither can contemporary theories fully support this innovative policy belief, nor do past policy practices show how a transitional country like China should enforce that belief. The paper advances an economic theoretical framework, i.e. innovation market theory, that is suitable for addressing the issue how to make market play its decisive role in the allocation of innovation resource. The differences between the theory and contemporary mainstream theories, as well as the advantages of the theory, are discussed in details. From the perspective of innovation market theory, the strategy how China deals with the policies advocated by the U.S. government to limit China’s innovation-based development is discussed. It is pointed out that China should deepen its reform to improve the efficiency of its domestic innovation market, which can not only relieve the stress imposed by the U.S. decoupling policy, but also help to establish a win-win, collaborative and open global innovation environment.