Middle income trap is a statistically significant phenomenon. Whether it can be avoided depends on the effectiveness and appropriateness of the way to handle it. It is extremely crucial for economic and social transition and sustainable development

the negation of which might bring catastrophic mistakes. This paper reveals that the inner nature of the middle income trap lies in the institutional transition dilemma

which results from the failure to properly handle the relationship between development and governance

leading to coexistent and interrelated government inefficiency

market distortion/failure and social anomie

as well as stagnant transition. This paper proposes to reconstruct the mode of state governance for China to avoid the trap through defining reasonable and clear governance boundaries between government and market as well as government and society. Thus

a state public governance mode featuring the interactive role of government

market

and society can be established

and the modernization of state governance systems and capacity can be achieved.