While nobody can deny the magnitude of China's economic transformation since the end of the 1970s, it may turn out that the first three decades since Deng Xiaoping switched course were relatively easy compared with what now lies ahead. There were, of course, problems in the growth trajectory, notably with inflationary bubbles, but success was made more likely than failure by the combination of a huge rural labor force anxious to earn money by working in manufacturing, cheap capital and rich markets abroad which welcomed the deflation exported from the People's Republic.

The second generation of expansion for the world's second biggest economy now looks more tricky as China tries to change its model and move up-market. The immediate danger is that the restoration of growth by the massive injection of funds under the stimulus program launched at the end of 2008 may block reform which the economy needs if it is to move ahead in a different gear.

As always, there are reasons for caution. The external environment is a lot less sunny, with recession in Europe and slow growth in the United States threatening sales abroad: concern that this may hit exporting companies and jobs is bound to weigh on policymakers as well as act as a deterrent to currency appreciation. Though China's productivity and place in the global supply chain afford it a degree of protection from rising costs, there is a clear danger of being under-cut in basic goods by lower-priced countries. Though inflation has dropped from its 2011 peak, it remains a constant threat especially given the difficulty of matching food supply with demand boosted by the emergence of a large middle class and the increases in the minimum wage.

But, if the dangers are there in slowing growth, a shrinking trade surplus and the bad debt hangover from the credit boom of 2009-10, we are not witnessing the coming collapse of China (nor, to quote another book title, is China on a course to rule the world with all the unwanted problems that would bring). Reality is more complicated and has a way of upsetting predictions of both bulls and bears. The challenges China faces only strengthen the case for reform which has been on the back foot in recent years. To take some examples:

So long as agriculture is held back by the small family farm units under the leasehold system and monopoly State ownership of land, food production will always risk falling below demand if there are bad harvests.

So long as credit is allocated administratively and uniform official interest rates are imposed, capital will be inefficiently allocated.

So long as the hukou registration system remains in place, labor mobility will be impaired - quite apart from the unfairness for urban migrant workers.

So long as water and energy prices are kept artificially low, two commodities of which China is short will be wasted - and there will be little incentive for companies to invest in improving the sectors.

So long as capital markets are controlled, the financial sector will lag behind.

So long as the fiscal system starves local authorities of the cash needed to meet their obligations, they will resort to land requisitioning with the resulting social discontent.

So long as market forces are not allowed to reduce excess capacity, efficiency will be jeopardized.

So long as favored companies in the State sector are bolstered by subsidies and preferential treatment, more efficient competitors will suffer.

So long as people have to save large amounts for health, education and old age, consumption growth will be held back, a flaw widened by the big cash piles of State-owned enterprises.

One could cite other areas where change is needed and the present system holds China back, notably in the law and accountability. The expansion of the State in the economy needs to be tempered. Private companies need to be given a larger slice of the cake as the World Bank urged in its report this week supporting reform measures. The shadow banking system needs to be regulated to reduce volatility for private companies that use it. State-owned enterprises may be natural candidates to become "national champions" but private firms should be given greater access to capital and orders - they are particularly well placed to drive expansion of the services sector.

Overall, it may well be that different regions at different stages should be encouraged to adopt different models best adapted to their circumstances taking into account social and environmental factors as well as crude GDP growth. One size does not fit all now that development has become China's way of life.

Lecturing China on what it should do is a singularly unprofitable exercise. In many ways, the country has been quite successful at finding its own way round the supposedly iron laws of economics. But, basing myself on 15 years of observation and analysis for my new book, I believe an important point has been reached where big decisions are required - if not for immediate effect then for implementation in the years up to the end of the current Five-Year Plan (2011-15).

There has been some progress, of course. The health service program has been launched and the education budget increased. A new pension scheme is being tested in Chongqing. Four provinces or municipalities have been allowed to issue bonds. Local initiatives in trading land leases have been reported. But the effects to date have been limited.

The aim of rebalancing the economy toward domestic consumption and away from investment and exports as set out in the 12th Five-Year Plan is absolutely correct, and over-due. But implementation is a long-term process - "two five-year plans" as one Party School official remarked to me. Some investment programs have been modified, notably on the railways, but they remain at the core of the growth policies undertaken since 2008.

To boost the share of consumption, China requires not only appropriate macroeconomic policies properly implemented but also reform on the ground. It needs real national markets in key products and better logistics. Meanwhile, to move up technologically, there must be a broader skills base, tighter standards and greater oversight - making airliners requires a more sophisticated work force than to produce socks, toys and T-shirts.

Change inevitably brings opposition, particularly from those with something to lose. As a commentary in People's Daily last week on the 20th anniversary of Deng Xiaoping's Southern Tour put it: "No matter how well-calculated and wise they are, reforms will always instill opposition. Those with vested interests will use their advantaged position to speak against reforms, the media and the public will view reforms through critical eyes, while some with a Utopian mindset could have unreasonable expectations."

The risks and the obstacles are evident, but, without structural change, the danger is that economic evolution stops half-way and China finds itself stuck in a "transition trap" as a recent report from Tsinghua University warned.

Jonathan Fenby is the author of Tiger Head, Snake Tails, which will be published at the end of March. His previous books include The Penguin History of Modern China.