You do realize that this is a desperate attempt to try to get players to not reject the nonsensical output the mass combat abstraction used to produce on a regular basis, right? Not something which is an integral part of the setting.
Part of what makes Exalted work is that humans act like humans, and most other actors are humans or otherwise close enough to act like crazy humans. Humans being (shitty as usual) humans is the foundational bedrock of the setting. Anything incompatible with humans being humans is ill-conceived and needs to go rather than the other way around, you don't throw out something like "humans behave like regular humans" just so you can keep one stupid organization or one stupid subsystem.
I do think that justification of the MC system might have something to do with this setting element . . . but I
also think that the choice of handling this phenomenon in the MC system stems from wanting to support certain setting phenomena and prevent others. Notably, if you
don't do it the way it's done in the corebook, you make the epic clashes of armies lead by great swordsmen impossible, because everything becomes a War Of Obsidian Butterflies (substitute Silent Wind or other attacks that trivially pinkmist hundreds of standalone mortals/Extras, as appropriate).
Which brings me to another observation:
Exalted seems to be an endgoals-first game, as opposed to principles-first: if a setting element
looks cool, then the setting designers try to find a way adding it and of handwaving a justification for it, not the other way around. That's not the style of worldbuilding I'm used to, and normally I don't like it, don't approve it etc. But this is what
is. A case of '
one stupid organisation' can be explained as a lone oversight on the behalf of the world designers/authors/WW/OPP. But when there is a whole
trend of such things, I can do nothing but conclude that this is seen as normal/acceptable/written-as-intended by designers/authors/WW/OPP.
The authors seemed to want to give Exalted a mythic feel, and I've seen people criticise myths for likewise weird psychologies of its characters (e.g. Kronos eating a dressed-up rock instead of one of his kids, because he was told it's his Zeus).
@Hazard said it: there's bunk in them
all.
I do not believe the third part is in fact anything they, or anyone, wanted.
But calling Yozi-spawn "demons" instead of "blargs" or whatever the fuck is that "demon" having all of these connotations that the denizens of Malfeas don't play into is a feature, not a bug. It means they've got all those demon tropes to play off. You can't play with people's expectations when they don't have any particular expectations because they've never heard of a blarg. And it's important to remember here that part of what Exalted is is a reaction against all the D&D clones, and D&D makes up weird monster races all the time. Beholders, for instance, could totally fit in inside Malfeas. In the context of D&D, weird new monster races aren't surprising. But D&D also tends to play its demon tropes ruler-straight. So having a demon courtesan who first shows up to let an infertile couple have a child and can frankly take sex or leave it alone is surprising, and therefore more interesting than if it was a blarg doing it.
Calling them 'blargs' would merely play on the onomatopoeia, giving a generic bad thing impression. But using 'demon' implies that not only that the publically-accepted ideas about them are the sort of europeoid bad thing, but also that the
context in which the word sprung, and the bad traits for which the demons are seen as bad things, are Greco-Abrahamic in flavour. It's the difference between using 'rogue' and 'ninja', or 'warrior' and 'bogatyr', or 'prison' and 'gulag'. The former in each pair a descriptor which can still be subverted. The latter,
in addition, also establishes a surrounding cultural framework and context; it carries more baggage than the former.
'Underworld' is a good subversible word: it kinda implies this broad concept of a world of the dead lying below Creation, only turns out that it's more like a reflection existing in parallel of Creation. But if you use, say, 'cossack' in place of 'soldier', suddenly I know that the setting surrounding said warrior has cavalry and gunpowder and distillation and rebellious attitude.
There's a difference between making the public opinion in a setting untrue, and misleading readers
about what the public opinion is.