Because China’s economic growth relies chiefly on investment, it requires major injections of capital. As the government economist Wu Xiaoling put it, “In the past 30 years, we have used excessive money supply to rapidly advance our economy.”

Image Credit... Otto Dettmer

In most economies, that would lead to rampant inflation, but if we look at the rise in China’s Consumer Price Index over the last two years, it’s usually been in the range of 2 to 3 percent, and only occasionally above 3 percent. During the last decade, there have been only two occasions when prices rose sharply: in 2008, when the increase topped 8 percent, and in 2011, when it peaked at about 6 percent. Why has large-scale monetary inflation failed to trigger price inflation?

From official quarters, we hear denials that China’s money supply is inflationary. Sheng Songcheng, the head of the central bank’s statistics and analysis department, said in January that the money supply was large because the savings rate and the ratio of indirect financial investment (that is, funding in the form of bank loans) were high. China has one of the highest household savings rates in the world, surging recently to 50 percent of disposable income (although it is only a minority of households driving the trend).

Economists differ as to what this all means, but one professor of literature has coined a term for it: “the economics of corrupt officialdom.” Corrupt officials, he argues, have a lot to do with the absence of price inflation.

Corrupt officials generally do not spend the huge sums they acquire from kickbacks, and are loath to deposit their money in banks for fear it will be discovered. So they hide their money instead. The professor estimates that as much as 50 percent of the surplus money supply may have been taken out of circulation for this reason.