Last year, China experienced its slowest economic growth in nearly three decades. The trouble seemed to start in the fall. Wage growth has cooled. Surveys show that companies in the manufacturing sector have begun shedding jobs. And imports are down, hurting other major exporting economies.

There’s more than one reason for the slowdown. A rapidly aging population, a falling birth rate, a tightening Federal Reserve, and a slowing global economy have combined to put the brakes on China’s economy. Yet Beijing cannot risk a recession. The Chinese government will not allow growth to slow significantly, even if that means storing up problems for the future.

PERFECT STORM

China’s problems stem primarily from decisions made years—in some case, decades—ago. In the past, China benefitted from a growing workforce, which boosted GDP both by adding workers and because younger workers tend to be more productive than older ones. But around 2012, the working-age population began to shrink, the inevitable result of the one child policy, which was enacted in 1979. The decline in growth rates owes in part to this demographic winnowing.

Rising wages pose another problem. Chinese wages now match or exceed those of most other emerging market economies, making China a less attractive destination for foreign companies. On top of that, high living costs and administrative burdens have reduced the flood of rural peasants into cities to a trickle. The average disposable rural income in 2018 was 14,617 Yuan a year, low enough to make moving to the city prohibitive when the average price of an apartment in urban areas is now 14,678 Yuan per square meter.

Forces that drove Chinese growth in recent years are withering. China once relied on a trade surplus to boost growth, but today the country’s account is effectively balanced. Investment in fixed assets, such as factories, machinery, offices, and apartment buildings, was traditionally a major source of growth. But such investment fell as a share of GDP from 82 percent in 2016 to 71 percent in 2018, and a further drop is expected in the years ahead, as one in four apartments in China now sit empty and auto manufacturers are operating at just over 50 percent capacity.

Forces that drove Chinese growth in recent years are withering.

Some of China’s problems come from abroad. For years, the U.S. and Chinese economies have followed similar paths. Now, however, rising U.S. interest rates combined with slowing Chinese growth threaten to decouple the two economies. Interest rates on one-year Treasury bonds are now slightly higher than those on Chinese government debt, meaning that Beijing can no longer count on capital inflows from investors looking to get returns outside the low interest rate environment of the United States.

Since 2008, China has fueled its growth with debt. Now its manner of doing so has hit some stark limits. The country’s household and national debt have reached levels similar to those in most developed countries and debt is growing faster than nominal GDP. Those high debt levels make China an extreme outlier, as the most indebted large emerging-market economy. Most of the debt is held not by the government but by households and corporations, which pay higher interest rates. So the cost of servicing the debt now comes to more than 20 percent of GDP. In comparison, other countries with high debt levels, such as Japan and the United States, have debt servicing costs in the in the low-to-mid single digits as a percentage of GDP.

When Xi Jinping was reelected as Secretary General of the Chinese Communist Party in October 2017, China was approaching the end of a nearly two-year debt fueled expansion. Throughout 2016 and 2017, Beijing inflated industrial prices, boosting a struggling corporate sector that had taken on too much debt. Xi began his second term with what is known as new total social financing, the broadest measure of financing growth in China, growing at an annual rate of 32 percent. But Xi seems to have recognized the dangers of continued rapid credit growth and taken steps to rein it in. At the end of last year, new total social financing was shrinking at a rate of 15 percent. But although Chinese banking regulators may be right to want to restrain credit growth, doing so has added to China’s economic woes.

DOWN BUT NOT OUT

China’s economy depends on the policies set by the central government to an extent that few other economies do. The government’s formal and informal signals give firms and people their cues on everything, from which businesses to start to where to invest. If Beijing were to continue restraining credit growth, true economic pain could set in.

Yet it appears Beijing has buckled. The credit taps are flowing once again. In January, total social financing hit an all time high of 4.6 trillion Yuan, a 52 percent jump from January 2018, previously the second highest month on record. January’s financing is equal to 24 percent of all financing in 2018 and 5 percent of Chinese GDP. Even if Beijing restrains credit growth for the rest of the year, the sheer size of January’s splurge is likely to keep overall credit growth higher than in 2018. Although credit growth was more restrained in February, new total social financing for the first two months of 2019 is still 25 percent higher than the same period in 2018.

China’s decision to boost lending is hardly surprising. In recent years, the Chinese government has always stepped in to stimulate the economy during hard times, using the “Plunge Protection Team” to keep stocks buoyant, various bond swap programs to keep banks lending, and stimulus packages to keep firms building. A government that relies on its economic competence as its primary claim to legitimacy cannot allow a major downturn. As long as Beijing keeps lending growing faster than nominal GDP, the economy will likely continue to expand. Beijing seems willing to trade greater debt for higher growth.

Yet Beijing’s efforts to stimulate consumption are hitting their limits. Chinese households now owe more money relative to their income than those in many developed countries, including the United States. That depresses consumption. Some research suggests that Chinese car purchases, for example, may not return to their previous levels until early in the next decade. Even basic purchases, such as phones and consumer durables, are stagnating as income growth lags.

Chinese economic activity may not be strong, but as long as credit growth remains robust, there is little risk of a significant downturn. As the economist Michael Pettis has argued, Chinese GDP has become an output rather than a measure—meaning that the government will do what is necessary to maintain the growth rate, and so the headline figure reveals little about the true state of the Chinese economy. Chinese growth may not be healthy or sustainable, but there is little risk that it will stop.

When a recession strikes a democratic country, voters can kick out the governing party. In China voters have no such option, which means that a recession could topple the entire regime. Because the stakes for the Communist Party are so high, and because the party has the mandate and the resources to keep going, expect China to keep muddling through.