SHANGHAI—For financially distressed local governments across China, Beijing’s recent Circular No. 62 landed as a bolt from the blue.

It instructed them to unwind tax and other incentives that made it worthwhile for foreign businesses to locate to their areas. Some investors, including China’s largest foreign employer, Foxconn , the Taiwan-based assembler of iPhones and iPads, froze their expansion plans. Others threatened to pull out.

Already strapped for cash as the economy slows, local governments panicked. Amid an uproar, Beijing backed down. The State Council yanked the edict and replaced it with one that scraps future investment incentives while leaving existing giveaways mostly intact.

The debacle dramatically underscores a new change of direction in the governance of China under President Xi Jinping. Decision-making has become top-down, more rushed and far less predictable.

Many outsiders have always believed that China operates a Stalinist-style command system that doesn’t wait around. But that’s far from the case. The system in place since the Mao era has been marked by extensive deliberation across the bureaucracy, step-by-step experimentation and a high degree of give-and-take between Beijing and the provinces. The benefit of that approach was that once policy was formulated, it tended to stick.