The Illusion of Control: Why China's Deflation Has Nothing to Do with Money 

Published on: 2025-04-19

Author: lvy

Reading Time: 8 min

Tags: #ChinaEconomy  #Deflation  #ConfidenceCrisis  #PolicyMyth  #TheInnerPath 

In current discussions around China’s deflation, the dominant narrative remains fixated on monetary indicators. In 2024, the official Consumer Price Index (CPI) rose only 0.2%, while the Producer Price Index (PPI) stayed in negative territory for months. As early 2025 data confirms the onset of real deflation, a familiar chorus rises among economists and policy advisors: increase liquidity, lower interest rates, expand credit supply. They seem convinced that if the "water" flows freely enough, the economy will inevitably revive.

Yet the evidence tells a different story. In 2024, China’s broad money supply (M2) surpassed ¥300 trillion, up 9.5% year-over-year. ¥22 trillion in new loans were issued—one of the highest figures on record. Household savings exceeded ¥130 trillion, marking an all-time high. Money hasn’t disappeared—it’s more abundant than ever. And yet prices continue to fall, and the real economy contracts. The paradox is stark: money is increasing, but confidence is evaporating.

This is not a case of "too little money." It is a case of economic paralysis, where firms won’t invest, households won’t spend, young people won’t plan for the future, and the middle class has collectively gone silent. Liquidity piles up in bank accounts but fails to circulate into real production or consumption. What we are witnessing is not monetary scarcity—but psychological retreat.

To call for more monetary expansion in such a context is not just misguided—it is analytically bankrupt. This error stems not merely from economic misinterpretation, but from a deeper institutional delusion: the belief in policy omnipotence.

Policy omnipotence is not an economic theory but a governing creed: the assumption that all social problems are tractable through centralized policy instruments. In the realm of macroeconomics, this belief manifests as an overreliance on “counter-cyclical adjustment,” “demand management,” and “policy coordination.” But beneath it lies a still deeper logic: the belief in the omnipotence of power—that human behavior can be designed, sentiment can be managed, expectations can be engineered, and systems can be governed top-down.

In this framework, the economist ceases to be an observer or critic. He becomes a narrative technician. Instead of interpreting society, he packages data into legitimizing symbols. Instead of confronting collapse, he reconfigures it into solvable “transmission mechanisms.” Instead of acknowledging the erosion of trust, he insists on "guiding expectations."

This technical rationalism replaces the emotional reality of lived economic life with abstract diagnostics. The deflation crisis becomes not a collapse of collective faith but a “problem of insufficient credit demand.” Trust, risk aversion, and existential uncertainty are smoothed into model variables. And so the real questions—Why don’t people want to spend? Why are private firms exiting? Why has the middle class gone passive?—are either ignored or erased.

This is not just a crisis of prices. It is a crisis of belief.

At its core, China’s deflation is not a monetary issue, but a collapse in institutional credibility. Trust in the future has eroded. Policy signals are contradictory. Property—the main store of middle-class value—has imploded. Employment is unstable. Regulatory frameworks shift unpredictably. In such an environment, money becomes inert. Credit becomes a fiction. And any attempt to reawaken the economy through monetary stimulus alone becomes not just ineffective, but tragic.

We are not offering policy recommendations. This essay does not seek to adjust dials, but to reframe the questions. When an entire society begins to withdraw from its own future, deflation is not a monetary malfunction—it is a symptom of systemic despair.

The real issue is not: How can we inject more liquidity?
But rather: How can we restore the possibility of belief in a system that no longer inspires it?

Money cannot restore trust.
Policy cannot manufacture confidence.
And models cannot replace meaning.

China’s deflation reveals not a lack of capital—but a lack of credible horizons.
Not a shortage of tools—but a shortage of paths.
Not an economic cycle—but a profound psychic withdrawal from the present into the safety of stasis.