Over the last decade, China has made remarkable strides towards the establishment of a market economy. But the progress achieved so far has been uneven. This report evaluates the extent to which China, through the adoption of specific measures, has been able to establish well-functioning markets. Well-functioning markets imply markets which transmit accurate signals to economic agents in terms of production decisions and factor allocation. The report distinguishes between the regional or spatial aspect of market functioning, and the movement from plan to market. Following a policy evaluation, the report analyzes the new system for allocating and distributing goods that have evolved in the aftermath of planning. The report also discusses present regulation of markets in the changing environment. Finally, the report offers recommendations to help China accelerate its movement towards the adoption of well-functioning internal markets and an integrated domestic economy. These are grouped under four heads: 1) increased market integration through trade; 2) enhanced efficiency in distribution; 3) better functioning of new markets; and 4) a more appropriate regulatory framework.