Thanks to this approach, China successfully combined a market mechanism with its cardinal public ownership system and in so doing ushered in an era of unprecedented progress.

China's gross domestic product (GDP), on average, advanced by 9.3 percent each year from 1978 to 2000.

The wide shortage of commodities at the time of the planned economy has gone and the livelihood of Chinese residents has improved significantly.

China opted to carry out economic transition in a step-by-step way, rather than by radical reforms or even shock therapy as used in some other economies. This route proved to be the key to the success of transition, because it limited the negative impact of reforms to an acceptable extent and avoided social unrest.

China's economic restructuring started in its vast rural areas and was later introduced to cities gradually.

In 1979, some villages in the provinces of Anhui and Sichuan adopted a pilot household, contract, responsibility system which linked farmers' income to their output, rather than giving them equal salaries. The system was accepted in more and more places and by the end of 1984 covered 98 percent of the country's farmers.

The successful rural reform not only increased the income of farmers, but also accumulated huge and useful experience for reforms in cities.

Similarly, China's opening-up strategy was also piloted in its coastal provinces and later introduced to the less well-off hinterland.

The price reform was carried out in much the same way.

The control of grain price was first loosened in 1979, when the prices of nearly all commodities and labor costs were fixed by the government. The government started to deregulate the prices of most commodities in 1985.

In 1992, the number of categories of government-priced commodities was slashed to 89 from 737, which marked the formation of a market-based pricing system in China.

This progressive approach also helped China push ahead with an in-depth ownership reform.

By fostering non-State economic entities like private firms, China established a multiple ownership system. Some mixed-ownership enterprises, such as share-holding companies and share-holding partnerships now play a very active role in China's economic growth.

Today, non-State economies account for more than 40 percent of the country's GDP, while the State-run economy holds a leading position in some key sectors including energy, transportation, telecommunications, the arms industry and high-tech sectors.

The reform of State-owned enterprises, designed to introduce a modern corporate system, is now conducted according to law and the market mechanism, rather than by the government's policies or even direct interference as used to be the case.

Generally speaking, the success of China's economic transition strategy is attributable to the correct understanding of the reality of the country, as well as the trend of the times.

As China lags behind developed countries in economic strength, there is a long way to go to turn this ancient nation into an industrialized modern economy.

Therefore, profound reform measures are essential to realize the swift and sustained development of China.

Such measures include ownership reform, introduction of a market mechanism, reform of the distribution system to ensure people enjoy the fruits of their labor, and active participation in international cooperation and competition.

In 1992, China fixed the goal of establishing a market-orientated economy. The move was a natural result of the ever-deepening reforms as commodity and labor prices were freed up and the capital, real estate and technology markets took shape.

Today the market mechanism is playing a fundamental role in the economic life of China.

While the market system was introduced to replace a rigidly planned economy, the Chinese Government was also taking steps to adapt its role and establish an effective macro-control system in line with the new economic structure.

The government reformed the financial system and strengthened the central bank's power to supervise the market and safeguard the stability of currency. It also implemented a proactive fiscal policy to maintain steady economic growth.

There were many successes in the government's management of the economy, such as the 1996 "soft landing" which curbed inflation effectively.

However, problems still exist because of some outdated methods of administration. A typical example is that overlapping projects were constructed in many places, resulting in excessive productivity.

Therefore, changing the government's function and improving its working methods is a most essential part of China's economic transition.

The government is learning to manage the economy through economic and legal measures, rather than direct interference, to create a sound market environment.

During the transition of the past two decades, China has not only achieved rapid economic progress, but also maintained social stability because the pace of reform was kept within an acceptable range for society.

Reform is the engine of social development, but it must be soundly based on stable political and social foundations. China has learnt from its experience of the past two decades that it is only by striking a balance between reform, development and stability that economic transition can succeed.

The author is deputy-director of the State Council's Office for Restructuring the Economic System. The article is part of his speech at the Euro-Asian Forum early this month.

(China Daily November 12, 2002)