A sharp and sudden draining of funds from the interbank market a week-and-a-half ago, followed by equally fast liquidity injections, is an example of how China can support reforms to modernize the economy without harming its growth outlook.
In this particular case, measures were taken to restrain an informal network of money lenders while quickly restoring and protecting the financial intermediation by the regulated banking institutions.
This was a small-scale trial balloon of "creative destruction" – a process of innovation where a new system takes over from an old order – which China wants to implement in a vast program of reforms to build what President Xi Jinping calls "socialism with Chinese characteristics." What that means in purely economic terms is not clear, but it looks like something along the lines of the European model of "social market economy."
(Read More: China Turns From Driver to Drag on Global Growth)
At any rate, that seems to be implied by China's new leaders promising market economy and market-based reform mechanisms. Apart from that, little is known about the specific features of these reforms. A high level commission, presided by Mr Xi, is currently working on a detailed reform program to be presented next October to the third plenum of the 18th Central Committee of the Communist Party of China. Traditionally, third plenums are the launching pads for major policy changes.
Gradual and Orderly Reform Process
But one thing is clear. Reforms intended to create a more efficient economic system need not lead to slowing demand and output, as foreshadowed in repeated government statements.
No, the reform process China's Prime Minister Li Keqiang calls a "self-imposed revolution" does not have to "feel like cutting one's own wrist," a flagellant metaphor he used during his inaugural press conference last March.
On the contrary, China has the means to change the current structure of its economy in an orderly and gradual manner, and to make these changes politically and socially acceptable by maintaining its potential and noninflationary growth of about 8 percent. In fact, Mr Li (we should call him Dr Li because he is China's first prime minister with a doctorate in economics) said that such a growth rate was "within the reasonable expectations of our macroeconomic controls," during his recent visit to Germany.
(Read More: Why China's Economy May Be Headed for a Crash)
China is not a newcomer to structural changes and a creative-destructive process that follows in their wake. Just think of all the changes that were managed successfully from the time of an impoverished China Deng Xiaoping inherited in late 1970s, after the devastating Cultural Revolution, to the world's second-largest economy it is today.
Many of the reform processes that took place over that period of 35 years have been experiments with free and open markets and special economic zones - a reformist equivalent of the "Great Leap Forward" under the stewardship of the former Prime Minister Zhu Rongji during Jiang Zemin's presidency in the 1990s. That was the time when many inefficient state-owned companies were closed down, or merged in new entities, with millions of people losing their jobs in precarious conditions of a quasi inexistent social safety net.