This report, based on a review of the literature and field visits, takes a historical and comparative approach in examining the development of higher education in China, systemically and institutionally, in the context of China's broad social and economic changes. It focuses on four areas: (1) relationships between universities and the state, (2) impact of changes on university management, (3) financing higher education, and (4) quality improvement in instructional programs. The report identifies three principles to be observed in reform efforts (such as the State creating an enabling environment in which institutions have greater autonomy), and offers 13 recommendations (such as establishment of "centers of excellence") to meet the system's development needs and address its internal disparities. Five general approaches are suggested to assist the government in a gradual and selective reform effort. These include wide participation in the planning of change, concrete and realizable goals, developing efficient information flows, varying local goals according to capacity and capability, and establishing focused incentive mechanisms for institutions. Each of the four focus areas are discussed in context, current issues are identified, and specific recommendations are offered. Over 30 annexes and 26 tables provide detailed documentation to support the report. (Contains approximately 125 references.) (DB)