I've never really understand why inflation is necessary. The last time I am reading Mankiw's book, it says something like people don't like their wages decreased, that is why it can only increase. Basically, some psychological nonsense. Yet Michael Pettis, again, him, provided a good reason for its existance.
He thinks that there are two kinds of investment, the productive ones, where the cash flow of the future would be able to pay off the debt. The non-productive ones, where there would be no future cash flow from the project and the debt has to be restructured or implicitly inflated away. Inflation is a method for the society to absorb unproductive invement/debt. Since there would always be non-productive investment, there would alaways be implicit absorption of it, i.e. inflaiton.
Inflation, implicit or explicit, is the way to serve unproductive debt. There is always a limit on how much debt an ecnomy can take up, as the debt level changes, the economic agents change their behavior, for instance flight to safety. Also there is an accounting issue in Chinese economy, when you spend money on unproductive project, and does not create value, the correct way to register that money is as expense, but here in China, it is registered as capital. Therefore, the total wealth registered on paper is greater than the real wealth. This scheme can work if the economical growth is greater than the armotization of that capital, and it would stop when the debt increase decelerate. There is not an unlimited amount of capacity for debt, and we don't know where that limit is, that is the issue.
He was also asked why China reacted so differently comapare to the other contries in tersm of stimulating the economy during the Covid crisis, his answer is that it is easy for the major to build a bridge, that he know how, but there isn't an infrastructrue for him to directly redistribute the wealth.
He always have good takes on the Chinese economy, not ideologically driven, balanced. For instance, he mentioned financial repression of Chinese household, which is 50% of the economy while in other economies the proportion is roughly 70-80%. Because of the fixed interest rate stuff, there is an annual transfer of 14% interest rate from household sector to the non-household sector. He also talked about the dynamics of an economy driven by monetary policy, you just have to play the acquiring asset game, since that is how the game is structured. It has nothing todo with personal philosophy, just if you are in the position to have to play the game, that is the only way to do it. That is what he learned from the Latino debt crisis, when he told people to go after fixed interest rate loan, he was laughed at. Also he points out that Chinese measure the GDP as investment rather than production, so it is not comparable to that of the rest of the world.
here is his twit about how recent measures the government taken to boost consumption is all supply side reform:
It is striking that all of these recommendations are supply-side measures that will, at best, boost the efficiency of consumption. None of them will help actually rebalance demand towards consumption because none of them delivers a greater share of income to households.
The answer, I would argue, is that the paths a country can follow are heavily constrained by existing institutions. Albert Hirschman was especially sensitive to these types of problems. He argued that after many years of a "successful" economic model, a country develops a whole series of powerful institutions – social, political, legal, financial, and so on – around which political and economic power is formally and informally structured. These institutions won't adjust quickly and frictionlessly to whatever new model the government or the IMF try to impose unless it directly benefits them. That's why there is always significant resistance to reforms, and perhaps why they usually fail.
Take Russia's "shock therapy" reforms in the 1990s, for example. In principle these reforms made economic sense, but I'd argue that they assumed – incorrectly – that Russian institutions could adjust quickly and efficiently to the new conditions. But because they couldn't, the result was political and economic chaos. The same happened in Latin America in the late 1980s and early 1990s, when the LDC crisis forced them to adopt the "Washington Consensus" reforms.
For reforms not to be politically disruptive, they must fit into existing institutions, and they must evolve in ways that do not threaten current relations of politcal and economic power. This seems to be what happened in Meiji Japan, and even in post-Mao China, although not without seriously disruptive periods in either case.
Even though we pretty much know what China must do to rebalance domestic demand sufficiently to keep the economy growing quickly (redistribute at least 2-3 percentage points of GDP every year from elites and local governments to ordinary households), it doesn't mean it will be easy to do if it also involves – as it must – a significant transfer of formal and informal economic and political power.