China is in the midst of a capitalist transformation unmatched in modern history. This transformation, with massive social, environmental and political repercussions, follows the path of earlier capitalist transformations in Germany, Japan and elsewhere.

But in speed and scope, it is unprecedented, with huge implications for China and the rest of the world.

While the surge of capitalism offers great opportunities for China's citizens, this transition also has a very dark quality to it. China has seen the abuse of the weak and the prevalence of extremely harsh working conditions. There is rampant pollution, resource depletion and environmental destruction on a shocking scale.

This pattern is not unique. But the scale is beyond anything the world has seen before.

The best way to understand China's capitalist transformation and its impact on the rest of the globe is to look at three threads that weave together the forces of change under way.

Thread One: The transition is, and for some time will remain, incomplete. As one Chinese colleague put it: "China is both far away from socialism and far away from capitalism." Politics remains a dominant force in this emerging market economy.

What one ends up with is a hybrid: a state-dominant logic emphasizing political control coexisting with a capitalist logic emphasizing efficiency and commercial success. Which will prevail, or will China settle into its own form of "crony capitalism?"

Thread Two: While many of the features of capitalist development are visible in China, what emerges is something unique, an interplay of that state-dominant logic and capitalist logic that creates a host of hybrid institutions.

One example is the Chinese media conglomerate, which seeks to fulfill two apparently contradictory purposes. The first is quintessentially Leninist, to simply maintain party oversight of media content. The other is quintessentially capitalist, to seek economies of scale and maximization of profits.

What you get, then, is a somewhat bizarre reality where the dual purposes of an institution, such as a media conglomerate, are not readily apparent.

Thread Three: How will China's role in the global capitalist system evolve?

If China's evolution roughly follows its present trajectory, then China's rise will reshape the 21st century.

As with the rise of great powers before it, China's rise will be disruptive and difficult for the international system. Part of the problem is that China's huge size and rapid growth are complicated by an incomplete transition to a working capitalist system.

Perhaps never has the global system had to deal with such a large power at such an early stage in its development.

So, where do we go from here? There are at least three likely scenarios:

The first is in-system tinkering, in which current systems stay in place while Chinese leaders place stability and avoidance of social chaos above all other values.

The second is peaceful evolution toward a constitutional state. This implies huge reforms in the rule of law and empowerment of weak middle and poor classes. Unhappily, this scenario depends on the blessing of the Chinese Communist Party, which today seems far removed from being willing to take bold moves in political reform.

The third scenario is the emergence of crony capitalism, in which after several years of in-system tinkering, Chinese entrepreneurs settle into continuing their subservient ties with the party-state. China's variety of capitalism would then become stuck in a form of Chinese Crony Capitalism.

The problem with the first and third scenarios is that they don't represent a sustainable model. Thus, one can only hope that the choice will be made for peaceful evolution. The other two scenarios, state-organized tinkering or crony capitalism, could be massively destabilizing for the global capitalist system.

These two scenarios also raise the specter of a rise in Chinese nationalism, if for no other reason than to sustain the legitimacy of the ruling party as China's economic dynamism slackens.

Can the world accept and live with capitalism in the dragon's lair? This will be the major geopolitical and economic question of the early 21st century.

This commentary is based on a new book, "China's Emergent Political Economy — Capitalism in the Dragon's Lair," edited by Christopher A. McNally. McNally is a research fellow at the East-West Center in Honolulu. He wrote this commentary for The Advertiser.