China’s sputtering economy is altering the balance of power among its top leaders. For years, President Xi Jinping sidelined his second in command, Premier Li Keqiang, a proponent of economic liberalization. WSJ’s Lingling Wei explains that Li is now gaining clout and pushing back on Xi's socialist policies.

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This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Kate Linebaugh: China's leader, President Xi Jinping, has been in power for almost a decade and has run the country with an iron fist, so much so, he's earned himself a nickname.

Lingling Wei: He's earned himself this moniker, chairman of everything, among China's policy-making circles. He's taken personal charge of armed forces, national security, foreign policy, domestic politics, ideology, and economy.

Kate Linebaugh: That's our colleague, Lingling Wei, and she says in recent months, there have been signs that Xi's grip on power has loosened because the country's economy is faltering.

Lingling Wei: You're seeing consumer spending plunging. You're seeing manufacturing suffering. You are seeing private businesses unwilling to expand and spend. This dramatic slowdown, mostly triggered by the government's policies themselves, is really adding pressure on the top leadership as they go into this very crucial year, politically.

Kate Linebaugh: Now, Xi's economic vision for China is being called into question at a time when he's seeking a third term.

Lingling Wei: The pressure basically opened a door for some of his rivals, competitors, to swoop in and add pressure on him and say, "We have to make certain changes to make sure the economy doesn't collapse, to make sure people still have jobs.

Kate Linebaugh: Welcome to The Journal, our show about money, business, and power. I'm Kate Linebaugh. It's Monday, May 16th. Coming up on the show, how China's faltering economy is challenging Xi Jinping's economic agenda. For decades, China has walked a line between market forces and state control, and when Xi Jinping became president in 2013, he wanted to change the balance, easing up on capitalist leanings in favor of more state power. His philosophy goes back to the founding of China's Communist Party by Mao Zedong.

Lingling Wei: Xi Jinping grew up in the Mao era. He really adores the former chairman, the founding father of the People's Republic of China. For Mao Zedong, capitalism is only a transitory phase on the road to socialism.

Kate Linebaugh: Xi's embrace of this model was on display last summer when the Chinese Communist Party celebrated its 100th birthday.

Lingling Wei: It was really amazing event to watch. You saw on TV, President Xi Jinping basically wearing this Mao suit and standing behind a podium adorned with a hammer and sickle, which is the symbol of the party, and he pledged to stand for the people. After the speech, he sang along with these very socialist songs called The Internationale. In China, that song really has traditionally been a feature of the socialist movement and symbolized declaration of war by the working class on capitalism.

Kate Linebaugh: Xi's campaign to steer China away from capitalism came through in his slogan, "common prosperity," which is the idea that wealth in China needs to be redistributed.

Lingling Wei: It was meant to narrow the gap between the haves and have-nots in China and make sure income, wealth, is much more evenly distributed among the general public.

Kate Linebaugh: Over the past year, President Xi has done a few things that represented his efforts to promote common prosperity and reign in capitalism.

Lingling Wei: One was the clampdown on private technology firms. He significantly tightened party's control over those firms and also put in place legislations and rules restricting the kind of data they can collect, restricting their ability to go overseas to sell shares.

Kate Linebaugh: While Xi was cracking down on tech firms, he also tried to reign in real estate speculation, and he started going after the richest people in China.

Lingling Wei: You're seeing his government even going after Hollywood-style celebrities and other entertainers because they've made so much more money than ordinary Chinese, in some cases, forcing private entrepreneurs to hand over their fortunes. It was just really a wholesale effort to try to revamp China's economic model to make it much less Western capitalism style and much more like a socialist country.

Kate Linebaugh: Was China's leadership united behind his economic agenda?

Lingling Wei: The Chinese leadership is very good at presenting a unified message. From outside looking in, you always thought, "Oh, they're all on the same page," but the truth couldn't be more different.

Kate Linebaugh: One person critical of Xi's approach is Li Keqiang. Li is second in command. He became premier when Xi became president.

Lingling Wei: Premier Li, he's this very affable looking and bookish guy. When he first started out as the premier, he really wanted to remake China's credit-driven growth model by shifting government focus on supporting small and private businesses. He wanted those state companies to slim down and become more efficient. He obviously also wanted to grow this internet-based sector that include companies such as Alibaba and Tencent.

Kate Linebaugh: Traditionally, as premier, Li would be in charge of managing the economy with the power to enact his ideas of encouraging entrepreneurship. But that didn't happen because President Xi pushed Li to the margins. Lingling says she remembers one story from 2016, when the two men were both in their first term. They each made a presentation on how they would reform China's state-owned sector.

Lingling Wei: Their messages directly contradict one another. Basically, what Xi Jinping was saying back then was, "We must build stronger, better, bigger state companies with a central role for the Communist Party in their management." On the other hand, Li Keqiang was emphasizing the need to slim down state companies and to follow market rules in remaking them. Basically, one is calling on greater control. The other was saying, "No, no, no. We need to make those companies look like, act like more commercially viable entities."

Kate Linebaugh: Early on, Xi made it clear that he would be in charge of managing China's economy, and Li's embrace of open market principles fell out of favor. But Lingling says as the economy has started to show cracks, that dynamic has started to change, and Li is gaining power.

Lingling Wei: In recent months, his profile has been rising pretty significantly. He's behind a lot of policy reversals. Now, he's staging a comeback of sort.

Kate Linebaugh: That's after the break. Some big, outside forces have been hitting China's economy. There's Russia's war in Ukraine.

Speaker 3: China's economy could face sanctions from Europe if it becomes too supportive of Putin over Ukraine.

Kate Linebaugh: And then there's China's own struggle with several COVID outbreaks. The country has tried to stop the outbreaks with strict lockdowns.

Speaker 4: This approach in Shanghai has been hugely detrimental to the economy in China, to the people in China.

Lingling Wei: China had to not only deal with the outbreaks, but also repeating lockdowns. The lockdowns basically have involved confining people to their homes. That means businesses are closed, schools are closed, restaurants are closed, theaters are closed. The economic picture, as you can see here, is not pretty, to say the least.

Kate Linebaugh: On Monday, new data showed consumer spending and factory output tumbled in April, and unemployment rose to a two-year high.

Lingling Wei: Millions of college graduates in China this year are struggling to find jobs. Also, you have to consider millions of migrant workers and other kind of workers. The employment situation is very dire for the leadership right now, and this kind of economic weakness provided opening for Li Keqiang to finally put his foot down and say, "We can't keep doing what we have been doing. We have to make certain changes."

Kate Linebaugh: The changes that Li Keqiang put in place undid many of Xi Jinping's policies.

Lingling Wei: He helped get Xi Jinping to dial back some of the measures, including the crackdown tech firms, and on the real estate speculation, and some other areas those measures had this effect of damping growth. He really has led this kind of rearguard action to reverse some of those policies.

Kate Linebaugh: Premier Li has not been shy about doing so. Last month, he made a trip to show support for the country's tech firms.

Lingling Wei: The Premier made a point of visiting an industrial park populated with e-commerce firms. That's the exact industry that has been hit very hard by Xi Jinping's campaign. He stood in front of a crowd of e-commerce executives and their employees. He didn't give them a lecture about how bad you guys are. Instead, Li Keqiang promised to reinvigorate their industry and to promote entrepreneurship. Based on what we were told and also a video recording of the event, what Li Keqiang told the crowd was, "We support you. We support entrepreneurs," and he said that to cheering crowd.

Kate Linebaugh: Li's influence has also spread beyond technology.

Lingling Wei: Based on our conversations with officials and policy advisors in Beijing, China recently has eased this regulatory crackdown on private technology firms, loosened lending to property developers and home buyers, and even acted to help some manufacturers resume production when much of China has been forced into lockdowns by this very stringent zero COVID policy. He's been playing some behind-the-scene roles here to try to make the economy grow again, basically.

Kate Linebaugh: Where does this leave Xi Jinping?

Lingling Wei: I don't want to overstate the importance of his power or the role he's been playing. After all, Xi Jinping still is immensely powerful. But what's different now is it's no longer a one-man show, so to speak. There are other actors who are also emerging.

Kate Linebaugh: How is Xi Jinping viewing this resurgence of Li Keqiang?

Lingling Wei: We have seen that Xi Jinping has had to make some tactical compromises over the economy, because for the Communist Party, the economy really is the area where their legitimacy lies, right? If the economy keeps sinking, basically, that would erode the foundation of the communist rule. Xi's basically agreed to pull back from some of his policies, the campaign he launched over the past year. We don't seem to see this whole "common prosperity" slogan getting mentioned much in China these days, and we are seeing the top leadership body publicly signaling hot to this regulatory crackdown technology firms. He definitely has had to make some compromises.

Kate Linebaugh: Those compromises come as Xi seeks a third term in power later this year and puts together a new leadership team. But that team will not include Li Keqiang, who's stepping down. Lingling says Li is trying to influence the selection of his replacement, and his goal is another premier who would be a counterweight to Xi.

Lingling Wei: We're going to see if Li Keqiang's efforts pay off or not, or if Xi Jinping continues to be this most dominant political force in China, and will just become even more dominant and powerful going forward.

Kate Linebaugh: That's all for today, Monday, May 16th. The Journal is a co-production of Gimlet And The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.

Kate Linebaugh is the co-host of The Journal. She has worked at The Wall Street Journal for 15 years, most recently as the deputy U.S. news coverage chief. Kate started at the Journal in Hong Kong, stopping in Detroit and coming to New York in 2011. As a reporter, she covered everything from post-9/11 Afghanistan to the 2004 Asian tsunami, from Toyota's sudden acceleration recall to General Electric. She holds a bachelor degree from the University of Michigan in Ann Arbor and went back to campus in 2007 for a Knight-Wallace fellowship.

Ryan Knutson is the co-host of The Journal. Previously, he spent more than four years in the newsroom covering the wireless industry, and was responsible for a string of scoops including Verizon's $130 billion buyout of Vodafone's stake in their joint venture, Sprint and T-Mobile's never ending courtship and a hack of the 911 emergency system that spread virally on Twitter. He was also a regular author of A-heds, including one about millennials discovering TV antennas. Previously, he reported for ProPublica, PBS Frontline and OPB, the NPR affiliate station in Portland, Ore. He grew up in Beaverton, Ore. and graduated from the University of Oregon.