Speaking in Kyoto, Japan, on the first leg of a week-long, four-nation Asian tour, Bush on Wednesday said communist-run China was an example of a society that had taken steps toward more openness but had "not yet completed the journey".
With the US president due to visit China on Sunday, his remarks are sure to annoy his Beijing hosts.
"As China reforms its economy, its leaders are finding that once the door to freedom is opened even a crack, it cannot be closed," Bush said.
He painted a different picture of Taiwan, the self-ruled island over which China claims sovereignty, though he reiterated Washington's support for the "one-China" policy which maintains that Taiwan is not independent.
"Modern Taiwan is free and democratic and prosperous. By embracing freedom at all levels, Taiwan has delivered prosperity to its people and created a free and democratic Chinese society," Bush said.
"Leaders are finding that once the door to freedom is opened even a crack, it cannot be closed"
Asked later at a news conference if he was suggesting that China emulate Taiwan, Bush said his message was "universal" and he was "not necessarily trying to compare one system to another".
"What I say to the Chinese, as well as others, is that a free society is in your interests," Bush said speaking alongside Japanese Prime Minister Junichiro Koizumi.
Washington switched diplomatic recognition from Taipei to Beijing in 1979 in keeping with the "one-China" policy.
China has threatened to invade
Taiwan if it declares independence
Bush has said he would do what it takes to defend Taiwan but has urged it to avoid steps towards independence that might provoke China.
He reiterated that neither side should move to change the status quo and said the issue must be solved peacefully.
In the South Korean city of Pusan, Chinese Foreign Ministry spokesman Qin Gang said he "had not noticed" Bush's remarks on Taiwan but said US-China relations were generally "making progress".
Later on Wednesday Bush travelled on to the next leg of his tour in South Korea, where he is due to hold a summit with President Roh Moo-hyun on Thursday.
The trip is centred on the annual Asia Pacific Economic Cooperation (APEC) summit, being held in Pusan.