China's dual-track challenge can be won

With China's economic slowdown more apparent than ever, its prospects of avoiding a hard landing are weakening. Whether policymakers succeed will depend on whether they can navigate the challenges stemming from an increasingly divided dual-track economy.

The latest year-on-year data, from January, highlight the danger. The consumer price index dropped to 0.8 percent; the producer price index fell by 4.3 percent; exports contracted by 3.3 percent; imports were down by 19.9 percent; and the growth of broad money slowed by 1.4 percent.

Moreover, the renminbi has come under downward pressure, owing partly to the economic recovery in the United States, which has fueled capital outflows. Given huge declines in industrial profit growth and local government revenues from land sales, there is considerable anxiety that today's deflationary cycle could trigger corporate and local-government debt crises.