It was widely believed in the early 1950s that the socialist Chinese government was the saviour of the poor and the free market an evil to our society. However, when the government sent me to the Inner Mongolian countryside to be re-educated in the late 1960s, I realised that such ideological fervour masked the intrinsic flaws of our planned economy. That was the very beginning of my China story.

As a business leader, I experienced the reform of the past 30 years and learnt more about the problems we have to deal with in China. Today, the country is in the late stage of transition from a planned to a market economy – and disputes about the relationship between government and market are different from those in countries that have well-established market systems.

Even in an economy that has grown at 10 per cent annually in the past three decades, the debate remains: is this success due to government control or the effect of the free market? The answer to this critical question will define China’s future. Will it continue its unfinished free-market reforms or end our 30-year transition where we are now? Do China’s economic problems and social frictions result from market reforms themselves or from bottlenecks and backward steps in the reform process? Is China’s state-dominated economic model a transitional arrangement that has achieved its ends or an innovation that should be strengthened?

In addressing economic problems, democratic governments can compromise efficiency or overreact, as they are constrained by voter preferences and partisan struggles. The modern democratic system and the market mechanism are not always ideal partners. But there are no utopias and no perfect systems. The key to whether these systems can sustain themselves and be accepted by society is whether they can avoid big mistakes, and have mechanisms to correct mistakes and make corresponding adjustments.

Economists and politicians in history have sought alternatives to the modern market system. The two main experiments were the Soviet-era Lenin-Stalin model, on which China’s planned economy was based during the Mao Zedong era, and the east Asian model typified by Japan from the 1960s to the 1970s, which created the economic miracles of Japan and east Asian countries.

In the 1930s, when western economies were mired in the Great Depression, the Lenin-Stalin model led to the rapid growth of the Soviet economy, causing heated debate among economists. Thirty or 40 years later, the Japanese model led to another hot debate. But history has declared the failure of these two systems. The former was a rigid model designed to develop a country’s economic and military power at the expense of individual rights. The latter led to price distortion, misallocation of resources and business-government collusion.

Modern democracy and the market system need further improvement, but they remain viable, and mankind has not yet found an alternative.

So how does this leave China? Beijing launched the reform and opening up process in the late 1970s, then abandoned the planned economy and adopted a socialist market system. This averted the collapse of China’s economy and fuelled rapid growth. During the early stages of the transition, as the market was not yet developed, it was necessary for the government to play a leading role, resulting in a state-dominated system similar to the east Asian or Japanese model. Now, the mission of this state-dominated model is accomplished and it is time to overcome the constraints of special interest groups, transform government functions and further the process of market reform.

There are two essential tasks. A government now focused on the economy needs instead to build a rule of law and provide public services. An economic system now dominated by the government needs to become one led by the market and regulated by the government.

To achieve this, the government must scrap procedures for approving economic and market activities, except in industries where regulation is necessary. It must stop interfering with market prices and transactions, and phase out regulations on land, labour, energy and mineral prices as well as on capital (interest rates and exchange rates). It must reform monopolies; privatise state-owned assets fairly and efficiently; and reform the tax system to fully reflect the goal of improving social welfare. Spending on public services, including social security, healthcare, education, housing and the environment must be increased.

The spread of economic crisis across the capitalist world has cast the future of the free market into doubt. Yet China’s story does not support the case against free-market institutions. On the contrary, the past 30 years’ success was due to market reform. To keep progressing, it must now transform its government’s economic role and continue reform into a free-market system. This is its unfinished mission.

The writer is chairman of the Boyuan Foundation, and former chairman of China Merchants Group and China Merchants Bank