Slower China Growth Signals Days of Miracles Are Waning; Prices for knife fish, a delicacy, have fallen to $13 each from $220

Updated April 15, 2013, 10:11 p.m. ET

Slower China Growth Signals Days of Miracles Are Waning

By JAMES T. AREDDY and TOM ORLIK

Shanghai property developer Sun Ping recalled offering a bloc of villas for sale in 2006, a time when buyers queued overnight and traded spots in line for money. He sold 62 houses in three hours and figures those homeowners quickly saw their investments triple in value.

“That was a miraculous time,” Mr. Sun said. A recent open house he hosted drew only a handful of shoppers.

The days of miracles appear to be over in China, the world’s second largest economy. A cleanup is under way, following an economic party of epic proportions that lifted incomes but left behind debt, corruption and a mess of the environment.

After three decades of annual economic growth averaging around 10%, many industries are experiencing less bling and more blah.The lost momentum was evident Monday. Growth in gross domestic product slowed to 7.7%, year on year, in the first quarter, down from 7.9% in the fourth quarter of 2012, China’s National Bureau of Statistics said.

Retail sales growth last month slid to 12.6%, year on year, down from 15.2% at the end of 2012. Industrial production growth also faded in March, evidence that a late-2012 rebound could be losing steam.

China continues to have one of the world’s fastest expanding economies, but it faces a painful downshift from annual growth rates that spiked at 14.2% in 2007. Two dependable drivers of growth—demand for Chinese goods abroad and breakneck investment at home—have since slowed.

Shortly before he became president, Xi Jinping set the tone for a downshift with actions that appeared to equate indulgence with corruption. During a visit to Hubei Province, he shunned trappings of high office and stayed at a small hotel. His menu at one meal included just four dishes and one soup.

Mr. Xi’s humility has struck like religious canon. To avoid appearing corrupt, lower-ranking officials suddenly shun five-star hotels, as well as such delicacies as bird’s nest soup and even fruit, according to restaurant and hotel managers.

Less indulgence by officials “may be the largest factor” in dragging down first quarter growth, according to Lu Ting, China economist at Bank of America Merrill Lynch; 10 million of them carry government-issued credit cards that, on average, rack up annual spending of about $5,800, or a total of $58 billion, according to Shanghai research firm Emerging Asia Group.

One measure of the funk is a 94% price drop for the yellow-colored dao yu, or knife fish. Two years ago, one of the Yangtze River delicacies traded wholesale for more than $220. They now cost $13.

The new austerity also is deflating luxury markets for art, liquor, entertainment and clothing.

When Italian designer Giorgio Armani inaugurated a China flagship store in 2004, he hailed Shanghai as “the world’s most talked about city.” Before recently shuttering the store on the city’s riverfront Bund, Mr. Armani told fashion publication Women’s Wear Daily it was a “changed destination,” with shrinking appeal to shoppers.

A notable trend in luxury still revolves around Louis Vuitton and Hermès products—but they are being sold secondhand by people who need cash, according to one Shanghai store owner.

The dour mood is reflected in China’s art. Painter Fang Lijun’s bright, oversize heads once characterized frothy times. Now in vogue are canvasses from painters like Wang Taocheng, whose scrolls depict neighbors bickering over money.

The frugality campaign comes amid a broad realization that the scale of China’s economic expansion will be difficult to repeat. China’s total output of goods and services last year was almost nine times what it was in 1990.

In a little over a decade, developers in the commercial capital of Shanghai built some 240 million square meters of residential floor space, the equivalent of four Manhattans. Average prices surged 3.6 times, according to Shanghai Urban Real Estate Surveyors-Appraisal Co.

“Now, the timing is very tricky,” said Mr. Sun, the developer, referring to cautious buyers.

In early May, Mr. Sun’s company Shanghai Jingsheng Real Estate Development Co. previewed Aromatic Villa, a new neighborhood of condominiums, some featuring private elevators, wine cellars and fountains. Prices range from $1.2 million to $2.2 million.

Instead of needing guards to control eager crowds, as he did in 2006, Mr. Sun gussied up his open house with modern art, chamber music and a spread prepared by a French chef. Turnout was light.

China will have about 8% to 8.5% annual growth in the next few years, according to estimates by the International Monetary Fund. Other economists consider that forecast too high. They warn that China is lending too much to sustain growth and risks creating a dangerous credit bubble.

Weak growth in the first quarter came despite record lending by financial firms of 6.1 trillion yuan, about $1 trillion. More credit but slower growth suggests that new money is generating less economic benefit.

Returns are diminishing for investment in property, infrastructure and factories. The city of Changzhou near Shanghai, for example, is finding it hard to sustain its streak. Changzhou’s annual intake of foreign direct investment surged fivefold between 2001 and 2012, when it reached $3.36 billion. It attracted such companies as Covington, Ky., chemical maker Ashland Inc., ASH -2.49% Atlanta aluminum product manufacturer Novelis Inc. and Dutch paint maker Akzo Nobel AKZA.AE +0.33% NV.

This year, it will be “very difficult” to reach a 5% increase in such investments, said Thomas Zhang, a city investment promotion officer. A recent, weeklong marketing blitz by his office included visits to 291 companies.

Government agencies are depleted after spending binges on new offices, train stations and other expenses. A former Chinese finance minister, Xiang Huaicheng, recently said local government obligations stood around $3.3 trillion, about twice previous estimates. The revenue earned by cities from transferring land use rights dipped last year to 2.7 trillion yuan, about $443 billion, from 3.1 trillion yuan in 2011, according to the Ministry of Land and Resources.

Small business owners who once faced little official oversight now report being hounded for taxes and fees. When rumors hit northeastern Shenyang last year that government inspectors were conducting sweeps to collect fines for even minor violations, shop owners closed their doors until authorities pledged no such campaign was under way.

China’s factory owners are paying higher wages as the stock of rural workers shrinks and employees assert their rights by filing grievances, cutting into a competitive advantage that initially fueled many companies.

China’s manufacturing wages, for instance, were 4.2% of U.S. levels in 2008, according to the U.S. Bureau of Labor Statistics. No recent comparisons exist, but China appears to be losing some of its edge. In the first quarter of 2013, wages for migrant workers rose 12.1% from a year earlier, outpacing the growth rate of the economy.

Beijing hopes higher household incomes will trigger more personal consumption to rebalance the economy away from investment and exports. Consumption contributed 4.3 percentage points to China’s first quarter growth, compared with 2.3 percentage points from investment, said Sheng Laiyun, a spokesman for the National Bureau of Statistics. “Now we can say consumption has become the major driver of growth,” he said.

New restraint by formerly free-spending government officials should eventually channel more money into improving health care, education and other underfunded segments of the economy. The government has said it would raise social spending as a share of the budget.

But the immediate impact appears to be a drag on consumer spending, particularly at the top end. For the first time in 25 years, for example, banquet revenues fell during holidays at the start of 2013 compared with a year earlier, according to the Chinese Cuisine Association.

Demand appears to be shifting from gilded restaurants—with names like Mansion and Palace—to unpretentious-sounding places like Hefei’s Jinzhai Farm House. “If you don’t reserve here, you can’t get a table,” said owner Fan Ronghua.

China’s quick wealth fed hyper-expansion by the global luxury industry, which suddenly appears vulnerable. Only about a third of luxury shoppers surveyed this year by CLSA Asia-Pacific Markets said they would spend as normal during a sustained anticorruption campaign.

A decade ago, China’s top-earners mesmerized global marketers with their embrace of new and different experiences.

Today, nearly 62% of this group wished things “would stay the same” and more than half prefer staying home rather than attending parties, according to a survey by WPPWPPGY -4.86% PLC’s Young & Rubicam Group. “They’re feeling a lot of the hype was actually quite fake,” said Kaiyu Li, Y&R’s head of planning in China.