China's economy has apparently bounced back from the horror of the fourth quarter of 2008, when broad swathes of industry stuttered to a sudden halt. The hills are now alive with the sound of even more building than usual. Indeed, some have called it the most successful stimulus package in history.

It is important not to get carried away, though. Companies have more orders on their books, but the orders are all short-term. Exports are not going to recover anytime soon, and even if they do, boosting domestic consumption will be the key to sustaining China's growth into the future, and to recalibrating China's unbalanced economic relationship with the rest of the world, including the United States. So, the question is, 'What will it take to boost household income and provide incentives for households to consume more?'

Boosting consumer confidence will be the first step, although at first the data may suggest this is not a problem. Retail sales are still buoyant. In the first three months of this year, they were up 16% in real terms compared to the same period last year.

However, these retail-sales data include government and corporate purchases, which have both been boosted by stimulus measures. Tellingly, March consumer confidence fell again, to its lowest since the Severe Acute Respiratory Syndrome epidemic of 2003. Anecdotally, many retailers say sales growth started to slow after the Olympics in August 2008, and that this year is tough. Much of the stimulus spending will end up in the pockets of businessmen and officials. With scarcely any wage growth likely this year, it is difficult to see consumption continuing to expand at the double-digit pace it maintained from 2004 to 2008.

There are no easy policy fixes for this slowdown. There are structural reasons for low household income and thus spending. But China's policy makers ought not to let a good crisis go to waste. They should be thinking about what it will take to raise household incomes permanently.

China's own recent experience has proven the wisdom of this approach. In the 1980s, Deng Xiaoping boosted rural incomes by introducing a radical reform to allow households to take back management of their farmland from village collectives. Farmers jumped at the chance to sell the produce they grew. Using their extra incomes villagers started small-scale industry and the industrial boom began. Likewise, in the late 1990s, Premier Zhu Rongji responded to an economic crisis not just with stimulus spending but also with reform. He gave households the right to purchase the flat they lived in for some 20% of its estimated value. The measure quickly increased consumption by increasing household wealth.

Today's leaders should emulate the bold vision of their predecessors. Here are a few possible reforms to meet this crisis head on:

-- Provide universal health insurance -- and fund it. Medical care is a huge drain on every Chinese family. A hospital visit for a farmer still costs several times his annual income. Savings for health-care emergencies is one of the largest dampers on household spending in China. Beijing has been talking about health-care reform for years. Now is the time to get serious. Recent draft reforms involve controlling drug costs, creating better incentive mechanisms for doctors and nurses and ensuring universal health care.

But where will the funding come from? How about asking state-owned enterprises, which are theoretically owned by the Chinese people, to pay the people proper dividends? An experimental scheme in place since 2007 currently pays 5%-10% of the profits of large state-owned firms as dividends into the Ministry of Finance's general budget. Allocating the funds to support health care (or education) would provide a massive boost to the household sector. It would also help control the excessive investment which these companies are tempted to engage in.

-- Open up the service sector to real private competition. The last 20 years have seen China's manufacturing sector become world class and generate millions of jobs.

Competition has spurred innovation and huge productivity leaps. With that come higher wages. The same could be done in services, a sector generally dominated by large state-owned firms. Telecoms, financial services, logistics, media and entertainment -- all could be partly or wholly opened up to private involvement, with a big impact upon job creation.

-- Change the way the performance of local officials is assessed. Right now, GDP growth and tax revenues are the key metrics used to determine promotion within the bureaucracy. But that means money is thrown at investment instead of job creation, social services or environmental protection. Altering the criteria for promotion would change the mindset of officials; and changing their mindset would change the growth model away from investment and toward consumption.

None of these reform ideas will be easy to pull off. Local officials and businesses will put up stiff resistance to any loss of the privileges that come from the current investment-led growth model, things like the ability to distribute the huge funds associated with all these infrastructure projects. But we believe that now is time for China's leaders to review the lessons of three decades of Chinese reforms and undertake another game-changing structural reform to unleash household consumption.

Stephen Green / Susan Shirk / Zhang Bin

(Editor's Note: Mr. Green is head of China research at Standard Chartered Bank in Shanghai. Ms. Shirk is director of the University of California Institute on Global Conflict and Cooperation at the University of California, San Diego. Mr. Zhang is an economist at Institute of World Economics and Politics at the Chinese Academy of Social Sciences.)