CHINA first emerged from the global economic crisis and is now going about restructuring its economy to ensure sustainable growth.

Apart from launching a host of new initiatives, most notably the formulation of a low-carbon economy, Beijing should go on to supersede its growth model with one powered by domestic consumption, which, I think, is the ultimate goal of a massive industry overhaul.

With the global economic future hanging in the balance, China's exports will predictably encounter intense overseas pressure. Like it or not, there is little China can do to quell the clamor for more protectionist legislation against it.

What it can and should do is to tap domestic demand for much of its future growth. Excessive reliance on exports is not a viable long-term option. In the absence of a domestic consumption-based economy, China's internal problems may fester and endanger social stability.

In my opinion, the quest for a domestic consumption-based economy is threefold.

Positive GDP growth

First, many of China's myriad problems are a product of underdevelopment and thus can only be solved with further development. But here we need to define development.

Development may work in some cases and fail in others, or worse, it may engender new problems.

GDP in itself is a neutral term, indicating no such madness for economic gains as is now the case with China. It mirrors both good and bad implications of economic growth.

China's GDP growth will be cast in a positive light only if it is generated by technological advances, managerial innovation and a rise in productivity.

By contrast, glowing GDP figures can hardly be justified should they come at the expense of social decay and highly commercialized education, health care and real estate industry.

China needs to embrace the bright side of development and eschew the ugly side. In the economic realm, the country may start by undertaking unfinished reforms of sectors left untouched in previous waves of liberalization. China's economic imbalances are best manifested by this contrast: inadequate liberalization in some industries and indulgence of market force in others.

Reform of corporate ownership structure in the mid 1990s turned many antiquated state-owned enterprises into modern businesses. But it fell short of chipping away at their privileges.

Nowadays these behemoths can mobilize considerable economic and political resources while enjoying unchallenged monopoly in their fields. They are essentially beyond state supervision or regulation.

In theory, the interests of SOEs should be aligned with those of the general populace. They aren't.

Many SOEs have fallen into individual hands as a result of partial liberalization - or outright privatization by another name - with those at the helm blatantly seeking personal gains under the disguise of nominal state ownership.

Administrative monopoly enables SOEs, many perennially inefficient, to extend their tentacles into private sectors.

Consequently, the society's wealth flows to state coffers, and truth be told, to those capable of working the system to their benefits. The result is the rich become richer and the poor poorer.

To restrain voracious SOEs, the government should spell out clear limitation as to how far SOEs can go. Otherwise, they are liable to abuse their monopoly.

In sectors where private capital can make a difference, precedence should be given to private businesses over SOEs.

Even in "sacred cow" sectors where state monopoly is unshakable, such as electricity generation, transport, communications, the authorities may do well to allow a certain number of private firms to cut a slice in the pie.

Equally important is the need to increase competition between mammoth SOEs and private entrepreneurs to enhance productivity.

Only by opening monopolized sectors to private capital can a plethora of Chinese capital moving blindly about the world be put to more meaningful use than helping inflate home prices in Europe, America and Singapore.

Smaller income gap

Distribution of fruits borne by economic growth poses a second challenge for China. A widening income gap will exacerbate the already severe polarization and threaten to derail the construction of a domestic consumption-based economy.

Distribution of wealth in China is a two-step procedure ridden by inequality.

If the primary distribution is unfair, then the secondary distribution, no matter how complex it is, won't reduce the inequality already inflicted.

The thriving of small and medium enterprises (SMEs) is the linchpin to even distribution of wealth. In China, however, these firms have long been victims of discriminatory state policies.

The central government's 4 trillion yuan (US$587 billion) stimulus fund mainly went to centrally administrated SOEs and local governments. Very little if any trickled to SMEs.

Another inherent problem plaguing division of wealth is SOEs' "gray income" - revenues extracted through monopoly.

To some extent, SOEs function like enclaves outside state jurisdiction. Their bosses enjoy a free rein to allocate gains accruing from state assets appreciation. The income and benefits of senior executives often are many times those of workers at the bottom of the pecking order.

Ordinary laborers have to live with low wages, a consequence of the authorities' pro-business bias.

Falling under the spell of a GDP fetish, some local governments have eagerly assisted employers in quashing employees' demands for higher wages.

This is evident in the Pearl River Delta, the success of which as a manufacturing hub still hinges upon unskilled migrant labor 30 years after it opened up.

There are few signs of an industrial upgrade there in the offing. The existing growth model promises no rosy future.

Secondary distribution of wealth, or taxation, in China is not designed to alleviate income disparity.

The tax system is regressive, not progressive in nature. The low threshold for taxation imposes a financial burden on China's have-nots, whereas the haves aren't taxed in a way that corresponds to their purchasing power.

Worse still, taxation in some localities I once visited risks becoming an official tool to exploit and bully private entrepreneurs.

Balanced policy

The third step toward building a domestic consumption-based economy is the formulation of a sound social policy.

For a long time Chinese governments at all levels knew no borders separating economic and social realms.

They made the erroneous decision on the one hand of applying unbridled liberalization to housing, education, social security and health care - issues that the government is obliged to take care of rather than let the market call the shots over.

On the other hand, SOEs blessed with official patronage fiercely resist any attempt to fully liberalize them.

More than a decade of laissez-faire liberalization in social sectors has torn asunder Chinese social fabric and shrunken the budding middle class.

Without a large middle class any hope of establishing a domestic consumption-based economy would be a castle in the air. China needs first and foremost to cultivate and protect its middle class.

The authorities have rolled out a raft of measures responding to the aforementioned problems. But so far they are incoherent and unsystematic. China's deepening development requires a balanced relationship between economic and social domains.

(The author is professor and director of the East Asian Institute, National University of Singapore. The views are his own. This article is based on his June 6 speech at the 3rd China Opening-up Forum held in Ningbo City, Zhejiang Province. Shanghai Daily staff writer Ni Tao translated and edited the article.)