China’s High-Wire Act: Downshifting Growth Without Slipping Into Stagnation

A workshop in Dongguan, Guangdong province, China. PHOTO: QILAI SHEN/BLOOMBERG NEWS
A workshop in Dongguan, Guangdong province, China. PHOTO: QILAI SHEN/BLOOMBERG NEWS

Summary

Leader Xi Jinping has made clear that growth at all costs is out. Now, the challenge is finding a new path—and rallying the people to his side.

BEIJING—It is the end of the Chinese growth miracle as we know it, and Chinese leader Xi Jinping seems fine with that.

The question now is whether he can steer the country onto a new course—and keep the rest of China on board.

After three years of pandemic-era distortions, the longer-term trajectory of the world’s second-largest economy is coming into focus, and it is showing a plateauing of growth that would have alarmed previous Chinese leaders.

Xi, however, has different priorities. He has made clear in recent years that growth at all costs isn’t what he is interested in. What he wants instead is what he calls “high-quality development," a somewhat nebulous concept that economists and advisers say includes a greater emphasis on national security, political stability and social equality.

Graphic: WSJ
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Graphic: WSJ

With his increased focus on ideological purity, he cares less about keeping up appearances for the markets—as evidenced by a surprise announcement on Monday that Beijingis axing Premier Li Qiang’s annual appearance before journaliststo field questions on the economy.

Xi is willing to accept slower growth in return for advancing these goals because he thinks the new priorities will strengthen Communist Party control and bolster China’s ability to stand up to Western powers, helping restore the country to its rightful place in the world.

Carrying out a transition from rapid growth to a slower pace is a tricky challenge for any government. Trying to pull it off in the midst of mounting geopolitical threats and rising internal dissatisfaction will prove especially challenging.

The risk is that Xi overcorrects and allows China’s economy to slip into long-term stagnation, as Japan did in the 1990s—and triggers more dissent in the process.

Signs of the leadership’s shifting emphasis have been popping up in more places in recent months: in Xi’s speeches; in raids on foreign businesses; and in public-service announcements by the country’s spy agency calling on China’s people to become more vigilant against foreign threats.

“Security is the bedrock of development, while stability is a prerequisite for prosperity," Xi said in a speech last year.

The signs are also manifest in what is missing—most conspicuously, in big-ticket stimulus measures such as the government infrastructure-spending sprees that provided economic jolts during previous slowdowns. Despite a chorus of recent calls from economists and investors for Beijing to do more to stimulate growth, Xi has made clear that he sees bazooka-style measures as acts of profligacy, storing up long-term pain in the name of short-term gain.

More evidence of China’s shift is expected to come Tuesday, when Li unveils the country’s official economic-growth target at an annual legislative session in Beijing.

Economists generally expect Li to set a goal of around 5% gross domestic product growth this year, the same level as last year. But even if it is a bit higher than that, it is likely to reaffirm Beijing’s willingness to live with a permanently lower level of economic expansion than the blazing growth that the world had long come to rely on.

The International Monetary Fund has penciled in 4.6% growth this year, the lowest in decades apart from the pandemic period.

To be sure, nobody expected China’s growth to continue at a double-digit percentage growth pace forever. But the speed with which China’s growth rate has slowed to levels not far above those of mature developed economies like the U.S. and South Korea has surprised many economists.

Leveling off at a lower level of development than those countries—China’s per capita GDP is somewhere closer to Mexico or Thailand—would also lock in the country’s middle-income status, with uncertain implications for China’s domestic politics, for its relationship with other countries and for the global economy.

The old model fades

For decades under Xi’s three immediate predecessors, China’s playbook was clarifying in its simplicity, placing growth front and center. It allowed China to unleash the resourcefulness of its population and raise living standards, as local officials and entrepreneurs aligned themselves in a common cause that filled the country’s coffers and bolstered its global clout.

This decadeslong orthodoxy came to an end in October 2017, when Xi used a Communist Party congress to remove presidential term limits and to hail the advent of a “new era" in which China’s leader effectively declared that growth was no longer the leadership’s paramount concern.

The following year brought the beginning of a trade war launched by then-President Donald Trump, inaugurating a period of stormier relations with the U.S. Three years of Covid-19 isolation and more geopolitical tensions only reinforced Xi’s preoccupation with economic and strategic resilience.

Those concerns help explain why, in 2021, Xi sought to rein in the private sector, cracking down on for-profit education companies, consumer internet platforms and real-estate developers. Those moves hammered the economy and stunned foreign investors, but that didn’t seem to perturb Xi and other senior cadres, who did little to ease the pressure even as experts called for a lifting of some measures.

It has since become clearer that the moves were part of a longer-term strategy to reassert Communist Party authority and its ideological priorities; reduce excessive risk-taking; and fortify the economy against potential shocks, most importantly by defusing a property bubble that many policymakers regarded as a ticking time bomb.

“The message is, ‘There are other things in life other than growth, so we need to rebalance the priorities,’" says Andrew Batson, head of China research at Gavekal Dragonomics, a research firm.

Uncertainty about what’s next

Outside economists and scholars have supported some of Xi’s measures, along with other efforts by China to move up the manufacturing value chain and promote research and innovation.

But they also say that many of Xi’s aims will be hard to achieve given the many headwinds China faces, including a massive debt load, unfavorable demographics and rising tensions with China’s trading partners in the West.

Xi’s plans also leave many lower-level officials in China less sure about how to proceed, since many of the leadership’s newer goals are more vague—and less appealing—than the “to get rich is glorious" ethos that animated China for so many years. That could exacerbate policy paralysis and a reluctance among risk-averse local officials to find creative solutions to the country’s economic problems, while feeding a sense of malaise that has set in as the economy has slowed.

Long-mooted overhauls that economists say are necessary to put China on a surer footing—including efforts to introduce a property tax, develop the pension system, raise the retirement age and restructure local government balance sheets—have been stalled for years.

Further economic listlessness will also play out beyond China’s borders, especially as factory owners seek to unload excess goods they can’t sell at home on global markets.

“The problem for President Xi and the Communist Party leadership is that their objectives are not intrinsically compelling enough, or answer all the questions that lower-level officials are asking as they figure out what to do," says Gabriel Wildau, a managing director at Teneo, a consulting and advisory firm with offices in New York and Shanghai. “It’s no longer clear where China is going or what the overarching objective really is."

But if Xi is feeling any anxiety, he isn’t showing it. “The fact that some elites who benefited from the old growth-above-all model are not happy doesn’t bother him," Wildau says. “They can eat some bitter now while the country goes through this wrenching transition."

Write to Jonathan Cheng at Jonathan.Cheng@wsj.com

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