Yu Yongding, Senior Fellow at China’s Academy of Social Sciences stated that, based on the decreases in the Producer Price Index, China is now in the middle of domestic deflation and that the continued negative growth of PPI is worrisome. Yu made these remarks at a forum held on October 27, 2015. According to Yu, overcapacity is the primary cause of deflation. "On the one hand, we try to reduce overcapacity, which results in decreased effective demand. [On the other hand], the decline in effective demand in turn leads to an increase in excess capacity, forming a vicious cycle." If China cannot reduce overcapacity faster than the rate of the effective decrease in demand, then China’s economy will decline further into an economic recession. Yu Yongding stated, “This is the most serious challenge we currently face."
Source: China Business News, October 27, 2015