China is Schrödinger’s economy. If you look at its statistics, it seems fine. But if you look at what its government is doing, it does not.

Perhaps the biggest move came early Thursday morning, when China announced it was ending its 36-year-old one-child policy. The move was a clear sign the government is worried about a shortfall in labor as the country ages and the birthrate slows. The country’s working age population fell 3.71 million in 2014, following smaller but still substantial declines in 2013 and 2012. “Starting in two or three years, you’re going to see another substantial, precipitous drop in young labour entering the labor market,”  Wang Feng, an expert on Chinese demographics at the University of California Irvine and Fudan University in Shanghai, told the Financial Times earlier this year.

That is perhaps the biggest sign China is begin to worry about long-term prospects. There are a lot of smaller signs along the way. The most recent came last week when China’s central bank  cut interest rates yet again, this time from 4.6 to 4.35 percent. The government also announced that commercial banks can lend out more of their money. That’s not what you do if your economy is really growing 6.9 percent, as the country claims.

But it is if you think the economy is slowing down more than the official numbers are letting on—which certainly seems to be the case right now. Consider this: China’s economy actually only grew 6.2 percent in total, but, because the government said inflation was -0.7 percent when it was more like 1 percent, that magically turned into the 6.9 percent real GDP growth Beijing was targeting. Funny how that works out. So in reality, as The Economist’sSimon Rabinovitch points out, it probably grew between 5 and 6 percent.

Why is China slowing down so much? Well, part of it is that it was always going to, and the rest is that people are afraid it’s going to even more. That’s because, no matter what it does, China can’t grow as much when there aren’t as many people moving from low-productivity farms to high-productivity factories. Indeed, it’s already reached that point in the last year or so. And that’s made people pull their money out of the country now that the mega-growth they were betting on isn’t materializing—which, in turn, has hurt growth more.

But let’s back up a minute. You aren’t supposed to be able to move money into or out of China. The government has rules against that, what economists call capital controls, to try to stop flows of money from creating unsustainable booms and unavoidable busts. The only problem is this doesn’t always work. Corporate bigwigs can use gambling trips to Macau to turn their yuan into casino chips and then into dollars they can move offshore. Or companies canpretend to pay more for imports than they actually did, and send the extra out of the country. Or they can keep it simple and just try to smuggle it out. In any case, though, it’s added up to $500 billion leaving China since the start of the year.

Now, this wouldn’t be a big deal if Beijing didn’t make it one. When people sell their yuan for dollars that means there isn’t as much demand for yuan—so their price falls. And that’s a good thing. A cheaper currency makes your exports competitive enough that you can make up for all the money leaving the country by making more money selling things overseas. Beijing, though, has cut off this escape hatch. Even though it devalued the yuan a little in August, it’s propped its currency up since then. It’s done that by selling some of its 3.5 trillion dollars for yuan, and forcing state-owned banks to do the same (although it has promised to make them whole if they lose money on this). The result is that the yuan hasn’t fallen nearly as much as it should have.

Beijing, in other words, wants to have its economic cake and eat it too—and it can for now. It’s possible to have a strong yuan and strong growth as long as it lets banks lend out more money. Why does that matter? Well, think about it like this. China has pegged the yuan to the dollar for a long time, and for a long time that meant keeping it artificially low. The simple story was that the yuan “wanted” to go up because China’s exporters had earned so many dollars that they wanted to turn into yuan. But that didn’t happen because Beijing bought these dollars with newly-printed yuan and then told the banks that they couldn’t lend these new yuan out. The idea was that the yuan wouldn’t be worth as much if there were more of them, but that wouldn’t have to turn into inflation if the government kept them out of circulation. That would keep the currency cheap and wages cheaper still, which, in turn, would allow China to keep exporting its way to first-world status.

But that process is going into reverse now. Beijing isn’t printing yuan to stop it from rising, but rather un-printing them to stop it from falling. That means there isn’t as much money in the economy at the exact moment that there needs to be more. It’s true that it can cut interest rates to offset some of this, but if it does that too much, it will only make even more money leave the country in search of higher returns elsewhere. So it’s letting banks lend out more instead. That pumps money directly into the economy without making it a less attractive place to hold your money. That’s the only way it can keep growth and the yuan from falling too much—at least for now. Beijing can do plenty more of this since the reserve requirement ratio is a still-high 17.5 percent, but that doesn’t do anything about the inherent contradiction here. China can’t grow as much as it wants if its currency is worth as much as it wants. At some point, it’s going to have to choose. Maybe it will let the yuan go down once it has gotten the IMF’s imprimatur as a reserve currency. Or maybe it will keep pushing the yuan up to boost people’s purchasing power.

No matter what your point-of-view, China’s economy is far from dead, but just how far does depend on your perspective.

By MATT O’BRIEN, October 29, 2015 in the Washington Post