When China embarked on its original economic reforms more than 30 years ago, it was clear the economy needed to become more market-oriented, says Nobel laureate economist Joseph Stiglitz of Columbia University.

"And so it has, with the private sector far more important now than it was," he writes in an article for Project Syndicate. "Moreover, there is a broad consensus that the market needs to play what officials call a 'decisive role' in many sectors where state-owned enterprises dominate."

So what role should the government play in the economy now?

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"Many of China's problems today stem from too much market and too little government," Stiglitz argues. "Or, to put it another way, while the government is clearly doing some things that it should not, it is also not doing some things that it should."

For example, it needs to address pollution, income inequality and corruption in the public and private sectors.

"Such problems could worsen as China restructures its economy away from export-led growth toward services and household consumption," he maintains. "Clearly, there is room for growth in private consumption, but embracing America's profligate materialist lifestyle would be a disaster."

China would do better to devote more resources to fix "large deficiencies in healthcare and education," Stiglitz explains. "Here, government should play a leading role, and does so in most market economies, for good reason."

China already has begun shifting from manufacturing to a service-based economy, Stiglitz writes. "There is still a long way to go. Already, many industries are suffering from overcapacity, and efficient and smooth restructuring will not be easy without government help."

In addition, China is undergoing rapid urbanization, he notes. "Ensuring that cities are livable and environmentally sustainable will require strong government action to provide sufficient public transport, public schools, public hospitals, parks and effective zoning."

China should heed a major lesson from the post-2008 global economic crisis, Stiglitz insists. "Markets are not self-regulating. They are prone to asset and credit bubbles, which inevitably collapse," he writes.

"America's infatuation with deregulation was the cause of the crisis. . . . China, one hopes, will not take the route that America followed, with such disastrous consequences. The challenge for its leaders is to devise effective regulatory regimes that are appropriate for its stage of development."

To do that, China should raise money through environmental taxes, a more comprehensive progressive income tax and a property tax, Stiglitz explains.

Meanwhile, a recent survey of analysts by Bloomberg produced a median estimate that the ratio of combined Chinese government, corporate and household debt to GDP will rise to 236.5 percent in 2016 from 225 percent last year.

"China needs to watch out: it has pushed the envelope," Louis Kuijs, chief China economist at Royal Bank of Scotland, tells Bloomberg. "It needs to work on mitigating the risks, mitigating the excesses."

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