Efforts to address these structural challenges are being frustrated not just by institutional barriers, but also by entrenched official corruption. The problem is that anti-corruption measures, despite enjoying broad public support, undermine bureaucratic effectiveness in the short term.

Institutional reforms aimed at combating corruption, reducing overcapacity, and dealing with unsustainable local debts will generate long-term dividends and sustainable payoffs. But short-term stimulus measures, such as tax cuts and higher fiscal deficits, will be needed to minimize growth disruptions. This would mean reversing the recent decline in the government budget deficit, which narrowed to 1.8 percent last year, from 2 percent of GDP in 2013.

The transition from a dual-track economy to a market-based economy will not be easy. The Chinese economy is clearly in urgent need of repair. But the news is not all bad: a substantial portion of the economy continues to expand, underpinning much higher overall growth rates than in most other economies. Moreover, despite some concerns about capital outflows, China's consolidated net foreign-asset position, which stands at $1.7 trillion, (17.6 percent of GDP), remains sufficient to sustain China through this tough transition.

China's leaders recognize the long-term imperative of serious institutional reform, even as concerns about slowing growth heighten the temptation to embrace short-term fixes. The authorities are taking strong action to curb pollution, improve energy efficiency, implement pension reform, and expand access to healthcare and low-cost housing.

More immediately, China's leadership is committed to excising the cancer of corruption. The key, as with any critical surgery, is to ensure that the necessary life-support systems are in place. In China's case, that means maintaining adequate liquidity.

In the end, sustainable development will require that China's two economic tracks merge. With the right approach, relatively stable and rapid growth can be maintained throughout the reform process. Avoiding a hard landing would be good not only for China; it would ensure much-needed growth and stability for the global economy.

Andrew Sheng is distinguished fellow of the Fung Global Institute and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng is director of research at the Fung Global Institute.

Project Syndicate