Q: After the People's Republic of China (PRC) was founded in 1949, China adopted the mechanism of a centralized planned economy. Now China has defined its goal of instituting a socialist market economy with Chinese characteristics in its reform and opening to the outside world. What is a socialist market economy and how is it different from the market economy of capitalist countries?

A: During the three decades from the PRC's founding in 1949 to the implementation of the reform and opening up in 1978, China stuck to a centralized planned economy, which was then regarded as a requirement of the fundamental principles of Marxism and socialism. Of course, the planned economy did play some positive role in China's economic development at certain time. Under the planned economy, China completed its transition from a semi-feudal and semi-colonial country with a crumbling economy to a socialist country with an independent and complete national economic system.

However, the socialist planned economy, as with any fresh concept in history, is not perfect. With the passing of time, its defects began to manifest. In running the economy, for example, it overemphasized the role of planning while ignoring the market's role in allocating resources. Rigid economic planning and excessive centralization, to a large extent, hampered companies' management initiatives and lead to insufficient production of consumer goods and severe shortages of commodities. Many Chinese people still have vivid memories of how difficult it was to buy one kilogram of cotton, grain or meat during the planned economy period.

Since China adopted reform in 1978, the country has gradually transformed the planned economy into a market economy with Chinese characteristics. In the process of the transition, China met with resistance from people who held the traditional thinking that "the planned economy belongs to socialism while market economy belongs to capitalism." Most people did not discard this misperception until 1992 when the ruling Chinese Communist Party clearly put forward the concept that "the goal of the economic reform is to establish a market economic system with Chinese characteristics."

Now we believe that market economy is a stage that cannot be surpassed during socialist development. In terms of social development, the essential difference between the socialist system and the capitalist system does not lie in the role the planning and the market plays in allocation of resources. The planned economy does not belong to socialism, since the capitalist system also uses the planning methods. The market economy does not belong to equal capitalism either, since the socialist system also uses market means. Planning and market, both of which are ways to regulate the economy, are indispensable at certain development phases of a commodity economy, which is based on socialized production.

Therefore, whether resorting to the planning or the market is not what differentiates a socialist economy from a capitalist economy. The most essential difference between a socialist market economy and a capitalist market economy is that the former is linked to the basic socialist system and is part of socialist economic mechanism. This is also the fundamental condition to guarantee socialism as the nature and direction of the Chinese economy.