China's State Council recently unveiled a comprehensive blueprint for capital market reform until 2020, in which it identifies two key objectives: "to support open, fair, and integral market processes, and to protect investors, particularly the legal rights of small investors". Achieving these goals, as the blueprint recognizes, will require policymakers to weigh market autonomy against State authority, innovation against stability, investor protection against caveat emptor and the temptation of rapid reform against the need for pragmatism. Can it be done?

From a policy perspective, the goal should be to strike a balance between competition (which spurs growth-enhancing innovation but can also generate instability) and cooperation (which promotes long-term social cohesion but can also lead to stagnation). In doing so, China's leaders must account for three levels of competition: inter-enterprise competition, inter-sectoral competition, and competition among the interests of citizens, businesses and the State.

The implementation of a competition framework for enterprises is a work in progress. In 2008, the government enacted an Anti-Monopoly Law aimed at preventing anti-competitive or "monopoly" agreements among enterprises, minimizing abuse of market dominance, and blocking mergers and acquisitions that would eliminate or unduly restrict competition.

But managing competition in a market that has three major players - State-owned enterprises (SOEs) and domestic and foreign private companies - is a complex task. Private-sector companies are frustrated with the privileges that SOEs enjoy, while foreign-owned enterprises complain that they are at a disadvantage vis-a-vis domestic companies.

The management of inter-sectoral competition is even more complicated. In banking, for example, competition is extremely fierce, and China is one of the few economies where concentration (the market share of the top five players) has declined in recent years. But, more than a decade after China's accession to the World Trade Organization, foreign banks' share of the Chinese market stands at a miniscule 2 percent - a reflection of Chinese regulators' failure to create a level playing field.

The challenge is intensified by technological advances and regulatory arbitrage. E-commerce platforms like Alibaba have not only breached banks' payment business; they have also begun to offer wealth-management products. And regulatory arbitrage has fueled the emergence of shadow banking, which is competing actively with traditional financial institutions for wealth-management and lending business.