Beijing’s efforts to hasten growth flopped in July, as factory output, investment and retail sales disappointed — and it’s a good thing.

As this column has argued before, any sign President Xi Jinping is tolerating slower growth could be a harbinger of major economic change. I know that the reflex among investors is to panic about losing one of the few engines propping up global growth and pine for more stimulus. But the closer gross domestic product is to 6.5 percent, this year’s target, the less Xi is doing to curb China’s excesses and avoid a debt crisis.

It’s always dicey to put too much weight on one batch of data. The 6 percent rise in industrial production, 10.2 percent gain in retail sales and 8.1 percent increase in fixed-asset investment in the first seven months of 2016 do indeed suggest a downshift is afoot. Even more persuasive, though, is a recent analysis by UBS looking at 765 mainland banks. It finds that in their efforts to clean up balance sheets, banks disposed of about $271 billion of dodgy loans between 2013 and 2015, while they raised roughly $94 billion of capital. Baby steps for sure, considering China’s $10 trillion economy, but welcome signs that bank bailouts and recapitalizations are afoot.

Lots remains to be done, of course. Estimates put China’s stable of bad loans at about $680 billion. Most likely, the figure is considerably bigger. The International Monetary Fund, for example, thinks Beijing is harboring roughly $1.3 trillion of IOUs that can’t be repaid. UBS reckons, conservatively I’d argue, it’ll take another $300 billion of additional capital to move China to a more sustainable bad debt ratio.

The point, though, is that the process may be unfolding. Xi faces quite the dilemma — ramp up credit and borrowing in ways that imperil China’s future or guide growth to a more sustainable flight path that enables Beijing to recalibrate engines to increase the role of services. Three-plus years into the Xi era, this is very much a trust-but-verify moment. Xi has been slow to reduce the role of the state-owned enterprises borrowing with abandon and stymying the development of a vibrant private sector.

China still boasts some solid growth drivers. Take cars, for example. As Thomas Gatley of Gavekal Dragonomics points out, sales volume jumped 23 percent year-over-year in July alone. “That breakneck pace will have to slow,” Gatley says, “but it is likely that the value of new car sales will keep growing faster than GDP for the next decade.”

That, he adds, will fuel jobs and incomes in ancillary goods-and-services industries — aftermarket parts makers and resellers, maintenance services, leasing providers and rental firms, you name it. Bottom line, Gatley says, “the resilient growth of the automotive market is one big target for investors seeking exposure to the rise of the Chinese consumer.”

But the zeitgeist in Beijing must be markedly slower growth and investors need to embrace it. As Morgan Stanley economist Robin Xing points out, this downshift is “more structural than cyclical” and driven by lower investment, policy uncertainty and a resulting drop in business confidence. Unlike past slowdowns, this one is less about external shocks than conscious policy choices by Xi’s government.

It’s promising, for example, that state-owned enterprises that long invested massively in unproductive infrastructure projects are getting fewer and fewer returns on investment. That’s reducing incentives to throw more good money after bad, injecting an air of rationality into financial dynamics. Fears surrounding Xi’s anti-corruption push is having its own chilling effect on new building projects and investments.

Again, this could all be a big head fake. There have been several moments since Xi officially took over in March 2013 when observers decided big reforms were afoot — only to regret it. But that same market impulse has a role to play in giving Xi the space he needs to rebalance the economy.

The pattern these last three years has been this: Chinese GDP disappoints, markets tank and Xi ramps up stimulus so as not to be blamed for the next Lehman moment. Anxiety in the trading pits of London, New York and Tokyo has become the economic equivalent of the tail wagging the dog. One year ago last week, for example, the step toward a more market-driven exchange rate economists had long recommended triggered a near global meltdown. Plunging Shanghai stocks, meanwhile, took the S&P 500, Nikkei and FTSE 100 down with them.

Xi’s whole modus operandi is bolstering China’s economic clout and soft power. Being blamed for the next global crisis would be a devastating blow to the strong and confident China narrative he’s spinning. Getting there, though, requires bold and destabilizing policy moves to turn China’s investment- and export-driven model upside down. Yet every time Xi tries, nervous nellies in global markets browbeat him into going slower on reforms.

It’s naive to think investors should ignore China’s zigs and zags. But the more they look over Xi’s shoulder and demand more stimulus, the less chance China has avoiding a crash. No industrializing nation has ever avoided one and it’s doubtful China will be the first. The good news is that efforts may be underway to beat those odds. Xi would be wise to accelerate them to avoid disappointing investors again.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com

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