Every time the State Bank of Pakistan (SBP) lets money supply grow drastically by issuing bonds or by injecting rupees on account of remittances, we expect inflation in a while. But when the People's Bank of China does something similar, no one in Beijing worries about inflation. For perspective, in 2026, Pakistan's headline inflation sits around 11%, while China's has hovered around 1%, despite both central banks expanding M2 supply by a similar magnitude.
Milton Friedman used to say that inflation is "everywhere and always a monetary phenomenon," but why does monetary expansion produce a cost-of-living crisis in one country and not in the other? The honest answer is that it depends on where the money goes, not how much of it there is. Inflation results from a rise in the quantity of money relative to output.
Printing money is inflationary, specifically when it makes demand grow faster than the economy's capacity to produce goods and services. If new money instead expands supply – new factories, new export capacity, new infrastructure – then it does not create the imbalance that shows up as rising prices. China's state-directed banking system routes new credit through businesses, state-owned enterprises, and local governments that end up in manufacturing, infrastructure, and property construction, and not household consumption.
Under 'window guidance,' Chinese banks don't primarily compete on interest rates as regulators tell them which sectors to lend to. The result is that when China expands the money supply, it mostly builds capacity. Supply keeps pace with or outpaces demand, and prices stay flat or fall.
Moreover, a high savings rate means that the velocity of money stays low, further suppressing inflationary pressures. In contrast, when Pakistan's monetary base expands, the dominant channel is not credit to productive private investments but rather financing the government's own deficit. A large and growing share of bank balance sheets is parked in government T-bills and Pakistan Investment Bonds, instruments that fund debt servicing, subsidies, and public sector salaries rather than factories or export capacity.
No asset creation takes place, and all the capital goes to the big, fat government machinery. This is demand entering the economy with no matching expansion in what the economy can produce – precisely the condition that predicts inflation.
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