The double exit of monetary policy and fiscal policy is the main reason for the "2010 Edition" of China's economy from stagflation to deflation.

Modern economic research shows that besides the supply shortage (such as the 70s oil crisis) caused 5-10 years of stagflation, excessive economic policies in the economic downturn cycle (including fiscal and tax policies, monetary policies, trade policies, etc.) will also lead to short-term stagflation (2-4 quarters).

There are two reasons for deflation: excess production capacity or insufficient effective demand.

Despite the significant drop in industrial prices, we can not say that inflationary pressures have weakened.

The deep-seated contradictions in the long term accumulation of China's economy (unreasonable distribution of national income, excessive super national treatment, underestimated production factor prices and low environmental maintenance costs), coupled with the larger supply of money, are still hard to say.

At present, China's internal economic structure is increasingly unbalanced, and the overcapacity is worsening. The accelerated pformation of the new round of economic development has begun in the beginning of the year, and the withdrawal of fiscal and monetary stimulus is also on the way.

With multiple factors superimposed, China's economy is likely to enter the medium-term deflation stage from a short period of stagflation.

The pition of economic structure will be a complex and gradual process. Policy adjustment during the period of government pformation will inevitably reduce economic growth and weaken social demand, and quantitative monetary instruments are difficult to effectively control the spread of price bubbles from the asset domain to the daily consumer goods sector, and price instruments will be forced to use.

In addition, overseas demand will also shrink further due to the sovereign debt crisis.

Under the superposition of many negative factors, China's economy is likely to enter the medium-term deflation phase (about 2-3 years, that is roughly the same period of China's economic structural pformation period) from short-term stagflation (about 1-2 quarters, if the central bank increases interest rates slowly and stagflation phase may be extended).

Historical experience shows that defense is a better combination strategy in both stagflation and deflation.

The stagflation of Chinese style is unstable, and the rate will probably turn into deflation.

Therefore, we should pay more attention to the risk of deflation in the long term.

Defensive disposition will be the preferred strategy, and stable earnings performance will help achieve better defense effectiveness.