By Lingling Wei 

BEIJING -- With Chinese stocks tanking over slowing growth in the domestic economy and the trade fight with the U.S., China's top securities regulator sought to project some confidence at a closed-door meeting last fall.

"Spring isn't far away," Liu Shiyu, chairman of the China Securities Regulatory Commission, told more than a dozen major private-equity and stock investors in October, according to people with knowledge of the event.

Since then, however, China's main indexes have mostly been chilly, and it is clear that even if there is an easing of trade tensions, a deep winter is setting in for the world's second-largest economy.

China's economic growth, though still strong by some countries' standards, has slowed to rates unseen in a quarter-century, and it is expected to flag further in 2019. Some economists project rates between 6% and 6.3%, down from about 6.5% in 2018; others say real growth has fallen to half that or lower. A big reason for the diminished outlook: Beijing is treating this downturn differently than in recent past.

Gone are big-bang stimulus measures like those rolled out during the global financial crisis a decade ago. Back then, the Chinese government spent about 4 trillion yuan ($580 billion), or about 13% of the gross domestic product at the time, on infrastructure, housing and other projects as a way to prevent massive unemployment and bolster growth.

This time around, the leadership is moving more cautiously, adopting a piecemeal approach to monetary and fiscal easing, while swearing off what it calls "flood-irrigation stimulus" -- a reference to the aggressive pro-growth policies of the past.

After decades of one of the most rapid economic ascents in history, a sustained slowdown in China would be felt around the world, affecting Australian government revenue, Japanese machine-tool makers and Chilean copper mines, as well as Apple Inc. and makers of expensive consumer goods.

Behind the shift in the Chinese leadership's attitude is an acute realization that options on stimulus are more constrained than in the past. Previous rounds of easy credit and lavish government spending stoked growth but caused a surge in debt, particularly among local governments and state-owned companies. The current debt level, estimated at more than 250% of China's GDP, is "a bit too high," said a senior economic adviser to the leadership who asked to remain anonymous.

Many local government-sponsored financing firms are having trouble repaying debts accumulated in recent years to build highways, airports and other projects. One such company in the northern city of Hancheng -- hometown of the second century B.C. historian Sima Qian -- raised 300 million yuan ($43.5 million) in 2017 by selling high-yielding products to private investors to turn the backwater into a tourist attraction.

When about 200 million yuan of those funds came due in November, the company failed to make good, according to a notice issued by Hancheng City Investment Corp. that was reviewed by The Wall Street Journal. The notice says that the local government is working with creditors to seek an extension of some of the debts. Both the company and the city government declined to comment further.

Also staying the leadership's hands, at least for now, is uncertainty over the unfolding U.S.-China trade conflict. Advisers to the Chinese government say Beijing needs to keep some stimulus measures in reserve in case the world's two leading economies fail to reach a deal and return to placing tariffs on each other's goods.

"China should be prepared for the worst-case scenario," says Wang Yiming, a vice director at the Chinese government think tank, the Development Research Center. If the Trump administration were to press ahead with all of its trade threats against China, Mr. Wang says, that could slash as much as 1.5 percentage points from China's GDP growth this year.

Recent negotiations have buoyed Beijing's hopes that an agreement with Washington can be reached by March 1, the deadline agreed to by Presidents Trump and Xi Jinping for a 90-day cease-fire in imposing tariffs on each countries' goods. China has renewed purchases of U.S. soybeans and dropped punitive levies on imports of U.S.-made cars and auto parts. A sticking point is whether China will address the subsidies and other deep-seated practices that the U.S. says favor domestic companies and limit foreigners' access to the domestic market.

While big-bang stimulus packages are no longer on the table, Beijing in recent months has deployed other tools in a bid to ease the slowdown. It has dialed back a two-year-long effort to rein in debt growth and has made it easier for banks to lend -- though banks remain reluctant to make loans, especially to small and private businesses, as their bad debts are piling up in a slowing economy.

In another turnabout, the central government has stopped hectoring city halls to restrain spending and instead has urged them to speed up investment projects. Authorities also initiated several rounds of tax cuts for both businesses and individuals to boost spending.

So far, however, official data show the downturn is deepening, hitting industrial production, factory orders and the property market. Consumers are tightening their belts, and private business sentiment is gloomy.

Many economists and investors expect Beijing to make sure growth doesn't fall too far too fast. After all, next year is the 70th anniversary of the People's Republic of China. A December meeting of the Politburo, the seat of power in China, noted the approaching anniversary and set stabilizing employment and growth as top priorities for 2019. At the same time, it also indicated that the government will continue its effort to control risks in the financial system.

"The overall goal will not be to accelerate growth," says China analyst Chen Long at Gavekal Dragonomics, a Hong Kong-based consulting firm, "but just to arrest the slowdown."

Ms. Wei leads China economics coverage for The Wall Street Journal in Beijing. She can be reached at lingling.wei@wsj.com.

(END) Dow Jones Newswires

January 20, 2019 09:40 ET (14:40 GMT)