By Mark Magnier

BEIJING -- The monetary easing and strong property market that buoyed China's economic growth last year are petering out, leaving policy makers with fewer tools to keep the economy humming steadily in an important political year.

Pushed ahead by a torrent of credit and fiscal spending, the world's second-largest economy clocked 6.7% growth for 2016, according to government data released Friday. Though the lowest pace in a quarter century, the rate was higher than many economists expected a year ago, when missteps over the stock market and currency policy raised questions about the government's economic stewardship.

Having won the battle for growth, Chinese leaders are now dealingwith a too-frothy property market, high corporate debt and other aftereffects of last year's policies. At the same time, officials and economists said, the leadership will only let growth moderate slightly, trying to keep the economy stable ahead of a reshuffling of the top echelon of the Communist Party later this year.

China's leadership will tolerate a slower rate of growth this year -- likely around 6.5%--to fend off asset bubbles and other financial risks that have become a leading priority, according to a senior government adviser.

"Everything centers on stability" ahead of the party congress later this year, said the adviser.

Given the political and economic pressures, economists expect Beijing to push on some of the same levers of stimulus as last year, though with less force and more care.

"High uncertainty means that Chinese economic policy makers will want to keep their options open," said Louis Kuijs of Oxford Economics. "But at least the reasonable current growth momentum gives policy some leeway."

At the top of the toolbox is bigger fiscal stimulus, especially spending on infrastructure, economists said. In 2016, China set a 3% target for its fiscal budget deficit to gross domestic product, up from 2.3% in 2015; economists estimate that last year's actual deficit was closer to 3.5% when off-book spending is included. This year the level is likely to be higher still, they said.

The reliance on such measures, economists said, is likely to delay needed reforms -- the streamlining of state-owned companies and retooling the inefficient financial system -- and set back a transformation of the Chinese economy.

China has announced plans to restructure the economy to avoid the middle-income trap, in which fast-growing economies fail to make the transition from low-cost, export-led manufacturing to domestic consumption and services. Earlier this week, President Xi Jinping told the World Economic Forum in Davos, Switzerland, that China has entered a "new normal" of steady but sustainable growth fueled by household consumption and services.

New drivers of growth Beijing wants to nurture -- consumption, high-tech and advanced manufacturing -- still aren't large enough or growing fast enough to compensate for a downturn in cement, steel and the other heavy industries that have powered the economy for years.

Consumption accounted for 64.6% of economic growth in 2016, 1.8 percentage points less than in 2015, according to official figures. While consumption is growing strongly, it decelerated to 10.4% year on year in 2016, from 10.7% in 2015.

One boost to consumer spending -- a surge in auto sales -- is likely to slow this year as tax breaks are reduced. Growth in personal incomes, at 6.3% last year, is lagging the economy, a trend which if continued could dampen spending, economists said.

Another spot of uncertainty lies in foreign trade, especially if the incoming Trump administration enacts punishing tariffs on Chinese goods, as the new U.S. president said he would do when he was campaigning.

Beijing is likely to see a pickup, or improved performance, this year in private and manufacturing investment, financial services, a declining if still significant real-estate sector and steady government spending. Those are unlikely to outweigh the expected downdrafts, said economists.

"We expect clearer signs of a renewed slowdown to emerge during the next couple of quarters," said Julian Evans-Pritchard, economist with Capital Economics.

Beijing is also expected to dial back on easy credit, which boosted growth but propelled speculation in the housing market. Total social financing, a broad measure of credit that includes both bank loans and nonbank lending, reached 1.63 trillion yuan in December, 6% less than November's increase and 10% less than the increase seen in December 2015.

The International Monetary Fund warned this week that continued reliance on debt-fueled investment risks a sharper slowdown or sharp drop in growth in coming years.

Housing prices rose 36.1% in 2016, the government said. To deal with the froth, more than 20 major cities have tightened purchase requirements -- measures which are beginning to bite. In December, 46 of 70 cities tracked saw prices increase, compared with 55 in November and 62 in October, according to official figures.

Lingling Wei and Pei Li contributed to this article

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

January 20, 2017 10:14 ET (15:14 GMT)

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