An increase in demand leads to higher supply. And inflation creates the illusion that there is greater demand for a product. Because we actually are creating more demand whenever money is created to help consumers purchase a product when they were willing but simply not financially able.
Businesses thus go out of their way to produce more product in order to collect on this inflation. This is why housing bubbles produce such a huge inventory of housing.
The reason why housing prices increase is largely due to a loose monetary policy. Either PBOC is printing more RMB, or banks in China are practicing a lot of fractional reserve lending. Whatever the case, this productivity would have never occurred under a period of no inflation. There just would not be the incentive to produce or to push the envelope if it is not driven by inflation.
By increasing inflation, or expanding the money supply, we are actually extending the production frontier beyond our normal expectations. In other words, by printing more money and pushing up inflation, China is actually creating new wealth.
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