Having undergone over 20 years of steady and fundamental economic reform, China has taken big steps toward its goal—creating the framework for a market economy under the rule of law. However, an evolving China faces a number of challenges: solving the remaining problems of the old system, resolving the contradictions generated during the period when the new and the old systems coexisted, and establishing a suitable environment for the new one.

China's problems include a stagnant rural economy, poor rural people, and a backward rural society, the incomplete restructuring of the state sector and of state-owned enterprises, serious unemployment in cities, a fragile financial system, polarization between the rich and the poor, social disorder, and widespread corruption. The country could have either of two starkly contrasting futures.A One road leads to a market economy under the rule of law, with a civilized political order; the other leads to crony capitalism. In view of the complicated contradictions and the possibility of an economic and social crisis, the way ahead for China lies in furthering economic, social, and political reform and in comprehensively establishing and improving the free-market economic system.

First, the country has a long way to go in improving the...